Interval Fund Brings Access, Democracy to Late-Stage Venture Investing

It's a story nearly as old as investing itself. Clients wrestling with thoughts of missing out on initial public offerings (IPOs) of story stocks such as Amazon, Facebook, Tesla and many, many more.

That scenario is evolving and, for many clients, not necessarily for the better. As the tech bubble of the 1990s initially taught and, more recently, a new spate of consumer-oriented and technology IPOs reaffirmed, it's great to get on the ground floor before a company goes public. You know, be a venture capitalist.

In many cases, early- and even late-stage investors in pre-IPO companies are almost guaranteed to make money. Using current examples, venture investors aren't going into the red amid the recent sell-offs in names such as Airbnb, Coinbase and DraftKings – each of which has recently been pounded. Actually, it's not unreasonable to assume it's early-stage investors that are part of the wave of selling hitting these and other newly public companies.

Fortunately, there are avenues for advisors looking to help clients get in on some pre-IPO action.  Consider the Interval Fund – Private Shares Fund from Liberty Street Funds.

Investigating the Interval Fund

The Private Shares Fund is structured as a closed-end fund and is relevant to a wide audience, including advisor clients, family offices and institutional investors. The Private Shares Fund is important for another reason: Many of the companies, including unicorns, expected to offer widely anticipated IPOs, are staying private longer.

“With many high-growth companies staying private longer than ever, a significant portion of their value appreciation has typically occurred before they get acquired or enter into the public markets. Because a significant amount of this value of accretion is happening, before many of these companies go public, it's potentially that much more important to be able to access these companies”, according to Christian Munafo, Liberty Street Chief Investment Officer.

Another, perhaps overlooked benefit of the Private Shares Fund is the type of companies it invests in. That's not an implication regarding industry and sector exposure. Rather, it pertains to the managers' preference for embracing late-stage firms over early-stage companies that are unlikely to be profitable and have volatile top line growth.

“We focus on what is called later stage venture capital and growth oriented investing, which basically involves looking to build access to companies that have moved well beyond their startup phase of development and the associated technology risk,” says Munafo. “They've often validated the value proposition for their product or service, they have an established market presence.”

For clients, the Interval Fund strategy can bear fruit in a number of ways, whether it be by a fund holding going public or being acquired at an attractive multiple.

Fund components have “started generating significant revenue traction, often across a broad customer base, while demonstrating attractive growth metrics and are on a likely path for an exit event, whether that exit can be a merger acquisition or a public oriented offering within the next few years,” adds Munafo.

Accessibility, Growth Matter

The secondary market – the market in which shares of still private companies primarily transact – has long been off limits to ordinary investors, but the Private Shares Fund provides access to this growing segment.

Data confirm it's growing. That market was doing $6 billion in transactions in 2005, but that run rate will be closer to or more than $100 billion this year.

“So it's a very large market that we're looking at,” notes Munafo. “ We've seen very clear trends over the past couple decades, where the number of publicly traded companies has essentially been cut in half, while the number of private companies continues to grow and they're also staying private for longer and growing into much larger, more valuable businesses. So your average investor, your average public market investor, arguably has less opportunities for alpha generation in the public markets, while there's significant asset growth and capital appreciation happening in the private markets.”

The Private Shares Fund democratizes a corner of the market that many clients are interested in but previously had no way of entering. Liberty Street provides that access with the Private Shares Fund and all it merely requires is a minimum investment of $2,500 and clients don't need to be accredited investors.  Those are favorable terms for clients and provide an avenue for advisors to bring clients into a coveted asset class they likely thought they were excluded from.