ETF Edge, April 22, 2024

And welcome to ETF Edge, your go to place for everything exchange traded funds. I’m your host, Bob Pisani. There is intense interest in trying to access the shares of tech companies that are still private like SpaceX and open AIA closed end fund. Destiny Tech 100 recently began trading on the New York Stock Exchange and is trading at a very large premium to its net asset value. But are there other ways to access private tech equity? Let’s talk with Brett Winton. He’s the chief futurist at ARC Investment. Also joining us is Howie Nig, head of analytics and investment solutions from Forge Global and Nicholas Colas from Datatrack, joining me here at the New York Stock Exchange. Brett, I’ll start with you. You and Kathy Wood launched the ARC Venture Fund in 2022. This is an interval fund. It also invest in private tech companies like SpaceX, Open AI and Epic Games, And it also owns public companies like Coinbase and Robin Hood. Now, you just published a paper that caught my eye claiming that this interval fund is a better way to invest in private companies. Can you explain why it’s why you think it’s a better way? Yeah, actually, interval funds were designed specifically to allow everyday investors to invest in less liquid assets, and the venture fits right into that idea. So with an interval fund, you don’t have to be an accredited investor, You don’t have to be, you know, very, very wealthy to invest in, in venture exposures like open AI. And you get to invest at the net asset value. So you can buy daily at the value of the underlying positions in the portfolio. And then you can sell quarterly. And so you have a a quarterly window in which you can kind of sell your position. And I want to, this is a good educational moment to, to inform viewers what an interval fund is. So with an interval fund, you can buy it any time at the net asset value. That’s the key. So you, there’s no premium or discount and you can sell to the company at set times on a quarterly basis. Am I, am I right about that? Exactly. And so that’s why it’s an appropriate vehicle for a liquid assets because it allows for kind of the the manager to prepare for the redemptions that come and have make sure there’s a pool of liquid assets that they can sell to meet those redemptions. And those happen quarterly. So and, and, and you own private and public companies. Why does the fund own both private and public companies like you own Coinbase for example? Yeah, the majority of the fund is in private companies, so roughly 80%. And then the the public equities in the fund is to facilitate that quarterly redemption process. You know, frankly it’s an amazing time to invest in innovation and we think both venture exposures and public innovation companies are are incredibly well valued today to take a a long term investment over what’s a unique decade in technological economic history. OK, Howie, let me turn to you. Private funds for qualified investors are also available at the Forge Global recently launched the The Forge Acuity private market index. This is a market capitalization weighted index that tracks the performance of 60 late stage venture backed private companies, for example, like SpaceX and Epic Games. And I know you told me this is already being used in a private fund. Tell us about this private fund, who is qualified to invest in it, right. So as first of all as a data provider and also as an index provider, liquidity provider in the space, we we just see all these different types of fund structure coming to the space, which is very exciting and I think very similar to the interval fund structure. The private fund is catering, I mean has a very similar redemption and contribution window. So you do transact a net asset value on the quarterly redemption basis. And I think for this fund it is targeting institutional investors. So it’s set up for to take contribution from qualified purchasers which are $5 million of net worth and you just have to qualify to invest in the fund. And what so qualified investors here are net worth of at least 5 million. And what’s the ticket size? I mean, you can it’s, it’s totally institutional, right? The ticket size is $100,000 at this point. Down the road you might get revised up. The idea about the private fund with qualified QP, qualified purchasers is to target the institutional segment. I think for any kind of asset class to, to just to mature, you’re going to have retail players and institutional players at the same time. So this one is just the first step that we actually see index investing and we’re targeting the fund manager is targeting the institutional segment, right? I mean, the obvious problem here with qualified investors is they cut out essentially the retail investors, right? I mean, I assume Howie, that was a conscious, obviously a conscious decision on your part, right? Yeah, it’s definitely a conscious decision on the asset managers path. But if you sort of think about the next product and the next product and more products come into the space, the idea here is that now it’s possible to for you to invest like an index discipline just similar to the public market, right. So this index is now launched for the first ever Pureplay institutional index plan. That’s not to say down the road we won’t see products that actually cater to the retail segment, but it’s still index tracking. So, Nick, let me bring you in here. This is just this highlights the fundamental problem here. Investors want access to these hot private tech companies, and it’s really hard to to do that. So isn’t the solution here to get more companies to go public long term? I mean, you’re the old wise man here. Tell us what what is your sense of watching this? People want these things and they can’t get to them. Yeah, it’s funny because IPOs, the IPO window is what we call it on Wall Street when a company can go public and even the hottest company can go public, but even smaller ones, it opens and closes over time. The IPO window was last opened at the very beginning of 2022 and then it shut hard and it hasn’t reopened since. We’ve only seen a couple of interesting IPOs this year. There are very few last year. So as you said, there’s a mismatch between investor interest in owning public companies and the ability of companies to actually go public in a relatively productive way. And that mismatch is exemplified by needing these kind of products. So Howie, you said you’re going to, you imply somehow there’s going to be something coming down the road catering to retail investors. What, what is it? Is it an interval fund like Kathy has and and Brett has here? What what’s going to come down the road that you have planned? No, I think the interval fund that that Cappy has is actually a very sort of reasonable next step, you know, other than these close and exchange traded close and fund, which is the fund that you’re referring to at the outset. So I think interval fund is definitely a possibility and and down to what they make. There might be other ways to access this. But before we even get to say like a 40 yacht ETF wrapper. Yeah, Brett, this is an ETF show. And so I know the viewers are, are wondering why can’t we just deal with this problem and create an ETF that holds the shares of these private companies? Isn’t, I mean, it seems in terms of how you want to do this, that’d be the best way to address the issue. Why can’t we do that? Well, it comes down to the kind of liquidity and ability to access the underlying exposure. So you, you can’t, you can’t just invest in a private company without getting the permission of the company to invest in it. And that’s an area where we do a lot of work. And actually we have an advantage because we’re so, you know, well embedded in the technology community to, to be able to approach these companies and, and both provide them with with information and then, and then, you know, invest direct on the cap table of these companies. And so if you had an ETF that had to accommodate daily inflows and outflows, it would be, you know, very difficult to actually have those assets be automatically deployed into the exposures that you are promising to your end investors. So there’s the problem. You know, I mean, to me as an ETF guy, Gee, wouldn’t that solve the problem? But there’s not enough liquidity to be able to pull that off. And you’ve got to go to the companies and invest in the shares. You can’t do it. So long term, you’re the wise man here. What do we do to get these puppies to stop sitting private for so damn long and go public so people can access, People want to get access to SpaceX, and, you know, the company sits out there quite happy. Yeah, I’d say two things. The 1st is when you’re a stable market for the rest of the year, and there’ll be more IPOs. SpaceX may go next year. Who knows when open AI goes or maybe there’s a liquidity event. But it’s going to be a runway. There’s going to be, it’s going to take some time. The 2nd is I think the public is now so much more in tune with understanding the power of destructive innovation that the next raft of companies were coming right behind these. Once these go public, we’ll get excited about the next one. So I think this is going to be a perpetual problem because these companies won’t go public as soon as people want to own them. And Howie, you’re sort of one of the experts I talk with you often about IPOs. What will force more companies to go public? Is it higher interest rates? I mean, most of these, a lot of these companies sitting around 1015 years old already. They’re middle-aged essentially. What what is your thoughts on that process? I think very similar to see the market situation in the public market. I mean, first of all, I, I do think that companies are actually staying private longer. So like it or not, there is going to be like, you know, your guest was just saying that there’s going to be a new batch of company that’s going to fill the spot of the SpaceX of the world that I’ve actually gone public. So I think the trend of companies thinks private longer is definitely there. Now the companies moving on to the public market and therefore sort of enjoying or the benefits of the public market is largely a function of how the public equity market is actually behaving. What kind of can they fetch the interest of the environment, the macro environment, to your point, Brett, is, is this a structural problem? By structural, I mean, do companies want to stay private longer, not just because they get new funding, but because they don’t want to deal with the regulatory burdens of going public. They don’t want to deal with the the scrutiny, the the quarterly reports. Is is there a a, a, a problem with the way the mark the legal requirements are going a public. I’m trying to figure out other reasons besides, oh, interest rates are, you know, too high or we’re happy because we’re getting funding or the market’s not right. Is there another reason that’s preventing all these companies that sitting out there for years and years from going public? Yeah, I mean, there are compliance and and kind of like legal burdens like to being in the public markets. I think that actually most public shareholders are not long term enough focused and that serves as both like unneeded near term pressure on companies and and can sometimes distract them from what they should be doing to differentiate themselves over the long term. And so we, as you know, a manager, both in the public and private markets, our emphasis is that we are investing in innovation over the long term and going to support management teams even as they make their way into kind of the public market journey to make long term decisions that are in the best interest of the company and the long term investors. And I think that’s, that’s a real challenge. A lot of public market investors don’t have that long term view. He’s certainly right about that. But I, I, my point is, I remember the 1990s and a lot of companies went public very fast. And the, the criticism was, oh, they’re, they were credibly volatile because they didn’t have much of A track record. And yet, given a choice of having that, I would rather have that than this where we have companies that are middle-aged that are still up. You know, look how old Reddit was before it went public. You know, that’s a long, long time to sit in private market. Another explanation could be that the challenges these companies are solving require a lot more capitalthanthe.com bubble companies did. And so they require a lot more capital. It’s much easier to go to AVC and have them write a bunch of checks as a major state, as a Series C, Series D and keep the company growing rather than go to the public markets and say, OK, do an IPO, then do a secondary 2 years later and do another 1-2 years after that. It could just be these company managements prefer the structure of going to the venture capital community, who, as Brett said, do understand the challenges. Do understand you’ve got to hold for a couple of years and are going to be patient through their process rather than going to the public markets and ask for those continuous around to fundraising to get to the end all. So how are you’re sort of an expert on on what’s going on with venture capital? Where where are all the the VCs? Where are they at the point where we’ve got to get these companies out there? We need more dry powder. We need to cash in or are they able to do some, you know, buy out where the company itself or other venture capital people essentially buy them out early stage investing? Where are we in this whole game? I think we’re definitely have been seeing things have started to turn around because if you’re focusing on the late stage 3 IPO set of companies, if you look at the Forge private market index, you know, one indication is that we have started to trend positive this year. The last two years have been negative. So I do think that you seem to see interest going back into the private market as companies starting to go public, there will be new companies to replenish the inventory, so to speak. So things are definitely trending better and, and the, and the access to capital is actually becoming easier. Brett, just let me go back to the Arc venture fund. Give us a, a sense of how you pick the funds here, the the stocks here, the companies. I see Epic Games 8% free Nome relation therapeutic 6% Entropic. There’s an AI play 5%. SpaceX is about 5%, Databricks is about 4%. How do you and Kathy sort of come up with this, this this Stew of, of, of companies and how do you decide which is weighted more or less? Yeah. So we believe that this is a unique time in technological economic history and that there are five major technology innovation platforms that are entering the marketplace at the same time, robotics, AI, multi omic sequencing, public blockchain and and energy storage. And and that’s the framework by which we approach these companies. So our analysts are, I think, best in the world on technology and then the select the companies we want to invest in and, you know, talk to them and, and then, and then write checks and what can you explain the fee structure for this? Because sometimes it gets a little complicated. What, what, what’s the, when you own this? What’s the fee structure? Well, I’d refer you to the prospectus. It’s 2.75 and the prospectus and, and investors pay no more than 2.9%. OK, Where do you think this is all going to go? What, what do you, I mean, besides just whether SpaceX, we can speculate whether SpaceX is going to go public this year or next year, What’s going to happen? Who knows what buddy Elon Musk is thinking right now, but where is this ultimately going to go? My hope is we, this is it that we’re seeing IPO’s starting to come and we’re going to get a flood, flood of IPOs this year. We’ve had a billion to $2 billion in the last few weeks. We’re going to get the next few weeks. It’s almost like 2019 again, when things were really opening up. Who knows? This could all end at any moment, but that’s my hope. What? What’s your, No, you’re right. Because ultimately the reason all this is important to public market investors because these companies drive future returns. If you look at what drives returns over any 10 or 20 year time frame in the SP500 for example, it’s really a handful of companies and it’s usually disruptive technology companies. So it’s very important to get these companies public. If you’re an index investor, it’s not, this is not an academic discussion because it’s just private markets. This is super important to get these companies public. So I also hope we get a raft of new IPOs and these kind of products continue to fund innovation and get the next raft of companies going that are going to go public in five or ten years. But it’s a very important process. It’s a very important dynamic that only U.S. equity markets really enjoy. This is not a phenomena in Europe or Asia as much as it is here. That’s why U.S. stocks outperform is because of this dynamic. And Howie Rubrics slated to go public Thursday right behind me here at the New York Stock Exchange. They’re gonna raise, I don’t know, 750 million or so, but they’re not profitable. So to me, this is an interesting test. Here’s a big well known data company that’s going public that’s not profitable. So how is the market going to greet that right now? I mean, any, any thoughts? I’m trying to get this opening up story going in a little more detail, right? I think will be will be a very interesting thing to watch because the last two IPOs you actually had companies that you know, were somewhat profitable and they’re actually a lot more profitable than say for example, rubric, which is a most growth oriented company. So I do think it is interesting to watch what the market reception is when it comes to rubric. Do people continue to optimize for growth? And that’s about earnings per share and profitability. So we’ll we’ll see. And Brett, you’re going to continue to invest in in early and late stage companies. You’ll want to drop any interesting names outside of the obvious, you know, SpaceX names on us that you’re particularly interested in these days? Sure. I mean, we just invested in in figure AI, which is a human head robots company. And amongst all the technologies we look at kind of our robotics forecast is new forward the most because of the acceleration in artificial intelligence and the capability that that kind of uncovers. So we think it’ll be an exciting, you know, business cycle for profound innovation that’ll change everybody’s lives. Sounds like an arc and vest pitch to me. Oh, wait, you are our confest. Thank you very much and appreciate that. That does it, folks. An interesting discussion here. You see what a mess it is. It’s tough to do this, but these people were trying to make it available to retail investors. And let’s see if we can get these companies public sometime. That does it for this week’s ETF Edge. My thanks to Brett, to Howie and to Nicholas. And we’ve asked Nicholas to stick around and give us his broader perspectives on the state of the markets and ETFs and earnings for our ETF Edge podcast. That’s coming right up. And remember, you can see all of our shows on our website, thatsetfedge.cnbc.com. Everybody have a healthy, happy and safe trading week. Get the AB CS of ETFs with the ETF Edge newsletter, your weekly update on the hottest trends, expert analysis, actionable ideas, and exclusive insight from host Bob Fasani. Sign up now at cnbc.com/ETF Edge Newsletter.