Sponsored: Tapping into Disruptive, Late-Stage Private Innovation Companies

By Christian Munafo, chief investment officer, Liberty Street Advisors Inc.; and portfolio manager, The Private Shares Fund

Over the last couple of decades, we have witnessed a dramatic shift in capital from public to private markets. Whereas most venture capital-, or VC-backed companies have historically generated the majority of their capital appreciation in public listed markets with broad investor accessibility, today these disruptive high-growth companies continue staying private for longer while scaling under private ownership with far less investor accessibility. Consequently, much of the growth opportunity set has moved out of reach for investors limited to publicly traded company shares.

While these dynamic companies are prospering and growing rapidly in the private market, the number of publicly traded companies on U.S. exchanges has contracted significantly over the past 25 years. This trend can be largely attributed to a combination of new regulations and the 2012 JOBS Act, which expanded the ability of companies to raise capital privately. As the below chart demonstrates, nowadays companies are staying in private ownership for far longer while appreciating in value more than any of the emerging innovators from two or three decades ago.

Staying Private for Longer 

The result has been that many public equity investors now face missing out on the growth potential of disruptive, private innovation-driven companies – many with proven business models and already in profit – during the most exciting phases of their development.

Tap Into an Expanding, High-Potential Opportunity Set

Today, more than 75% of U.S. companies generating at least $100 million in revenue are private, representing a greater portion of the overall economy than ever before according to Pitchbook, as of June 30, 2024. Specifically, there are roughly 18,000 late-stage VC-backed companies in the United States representing more than $1 trillion in fair market value. So, any investors unable to access these dynamic, revenue-rich, high-growth businesses while they are still in private hands could miss out on the opportunity to invest in them – at any point. In addition to providing an access point to these companies, we believe our focus on later-stage private innovation companies already generating significant operating metrics with proven business models, experienced investor syndicates, seasoned operators, and strong governance helps pave the way for attractive risk-adjusted return potential.

Bridging the Liquidity Divide

The structural illiquidity and inefficiency of private markets often creates attractive entry point opportunities to these companies during normal market conditions. During periods of increased market volatility and macro uncertainty, the ability to negotiate favorable terms increases due to the combination of sidelined capital and increased liquidity demand. As a result, there is currently a significant inventory of attractive opportunities due to supply-demand imbalances which will likely persist for the foreseeable future, thereby creating what we believe is an exceptional time for capital deployment. That said, we are also monitoring various market signals which we believe point to a positive shift in sentiment that should bode well for owners of these leading assets during the next cycle. Overall, while we continue to see opportunities generate significant returns in this asset class, it is important to understand the liquidity terms and conditions before investing in late-stage VC.

VC: A Breeding Ground for Future Champions and Disruptors

Seven of today’s largest U.S. market capitalization companies started as ambitious ideas in search of early-stage VC funding. As those companies have now become the established incumbents – which often leads to less innovation – we see the next generation of disruptors surface, including some that may create entirely new markets. While we support the entire VC ecosystem, we believe late-stage VC companies offer investors the most attractive risk-adjusted opportunity to potentially capitalize on the next wave of innovation in areas such as Generative Artificial Intelligence (AI), cybersecurity, and the space economy.

VC-Backed Companies Drive Global Innovation …

Dedicated to the Private Markets Space

Having developed trusted relationships with participants across the spectrum – from entrepreneurs, VC dealmakers, and private equity companies to IT industry network professionals – we have demonstrated an extensive ability to invest directly in companies, rather than adopt what is, in our view, the much less efficient fund-of-fund approach employed elsewhere. By implementing a combination of investment tactics which includes secondary transactions and participation in new rounds of financing, we look to access high-quality securities in leading companies at attractive prices. Importantly, we believe, our long-standing relationships throughout the VC and growth ecosystem and extensive transaction experience enable us to optimize various private market dislocations and inefficiencies by negotiating favorable terms for our investors.

A Valuable Portfolio Diversifier With Low Correlation

Over the past decade, we have developed a disciplined, institutional-grade process-oriented approach using a comprehensive due diligence framework to optimize our asset selection and how we structure transactions, with the aim of constructing diversified portfolios with attractive risk-adjusted return characteristics. And when we invest, we tend to think in terms of multiple years ahead, not multiple quarters, focusing our investments on late-stage disruptors that we believe are positioned to exit over the next three to four years. Said differently, we are investors, not traders. While many of the companies we target exhibit similar, or in some cases far more attractive operating metrics than small-to-mid cap growth companies in the public markets, we believe the private market comes with less volatility and lower correlation to listed markets, which can be attractive diversifiers for investors’ portfolio construction. Although the risks of investing in the asset class include the cash flow inconsistency and changes to the competitive landscape as dynamic companies grow, we believe that a strategic approach to managing these risks, backed by the experience, expertise, and insight to navigate the asset class effectively, represents a strong proposition to deliver attractive long-term returns from investment in high-growth, late-stage private innovation companies.

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The Private Shares Fund Top 10 Holdings As of Aug. 30, 2024*: GrubMarket, SpaceX, Nanotronics, Tradeshift, Axiom Space, Motive, Betterment, EquipmentShare, Arctic Wolf, Contrast Security

*Represents 33.47% of fund holdings as of Aug. 30, 2024. Holdings are subject to change. Not a recommendation to buy, sell, or hold any particular security.

The fund’s website updates top holdings and total holdings frequently. Please visit the fund’s website for the most current information here: top holdings; total holdings.

Christian Munafo is the chief investment officer of Liberty Street Advisors Inc., and portfolio manager of The Private Shares Fund. Munafo has more than 24 years of experience in financial services and investment management, with the last 19 years focused on secondary investments involving venture-backed and growth equity-oriented companies and funds. During this time, he has also served on the boards of many of these companies and funds.

The Private Shares Fund is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.

Important Disclosure

As of Dec. 9, 2020, Liberty Street Advisors Inc. became the adviser to the fund. The fund’s portfolio managers did not change. Effective April 30, 2021, the fund changed its name from the “SharesPost 100 Fund” to “The Private Shares Fund.” Effective July 7, 2021, the fund made changes to its investment strategy. In addition to directly investing in private companies, the fund may also invest in private investments in public equity, where the issuer is a special purpose acquisition company, and profit sharing agreements.

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus with this and other information about The Private Shares Fund (the “Fund”), please download here, or call (855) 551-5510. Read the prospectus carefully before investing.

The investment minimums are $2,500 for the Class A share and Class L share, and $1 million for the institutional share.

Investment in the fund involves substantial risk. The fund is not suitable for investors who cannot bear the risk of loss of all or part of their investment. The fund is appropriate only for investors who can tolerate a high degree of risk and do not require a liquid investment. The fund has no history of public trading and investors should not expect to sell shares other than through the fund’s repurchase policy regardless of how the fund performs. The fund does not intend to list its shares on any exchange and does not expect a secondary market to develop.

All investing involves risk including the possible loss of principal. Shares in the fund are highly illiquid and can be sold by shareholders only in the quarterly repurchase program of the fund which allows for up to 5% of the fund’s outstanding shares at net asset value to be redeemed each quarter. Due to transfer restrictions and the illiquid nature of the fund’s investments, you may not be able to sell your shares when, or in the amount that, you desire. The fund intends to primarily invest in securities of private, late-stage, venture-backed growth companies. There are significant potential risks relating to investing in such securities. Because most of the securities in which the fund invests are not publicly traded, the fund’s investments will be valued by Liberty Street Advisors Inc. (the investment adviser) pursuant to fair valuation procedures and methodologies adopted by the board of trustees. While the fund and the investment adviser will use good faith efforts to determine the fair value of the fund’s securities, value will be based on the parameters set forth by the prospectus. As a consequence, the value of the securities, and therefore the fund’s NAV, may vary.

There are significant potential risks associated with investing in venture capital and private equity-backed companies with complex capital structures. The fund focuses its investments on a limited number of securities, which could subject it to greater risk than that of a larger, more varied portfolio. There is a greater focus in technology securities that could adversely affect the fund’s performance. The fund’s quarterly repurchase policy may require the fund to liquidate portfolio holdings earlier than the investment adviser would otherwise do so and may also result in an increase in the fund’s expense ratio. Portfolio holdings of private companies that become publicly traded likely will be subject to more volatile market fluctuations than when private, and the fund may not be able to sell shares at favorable prices, such companies frequently impose lock-ups that would prohibit the fund from selling shares for a period of time after an initial public offering. Market prices of public securities held by the fund may decline substantially before the investment adviser is able to sell the securities.

The fund may invest in private securities utilizing special purpose vehicles (SPVs), private investment funds (private funds), private investments in public equity (PIPE) transactions where the issuer is a special purpose acquisition company (SPAC), and profit-sharing agreements. The fund will bear its pro-rata portion of expenses on investments in SPVs, private funds, or similar investment structures and will have no direct claim against underlying portfolio companies. PIPE transactions involve price risk, market risk, expense risk, and the fund may not be able to sell the securities due to lock-ups or restrictions. Profit-sharing agreements may expose the fund to certain risks, including that the agreements could reduce the gain the fund otherwise would have achieved on its investment, may be difficult to value, and may result in contractual disputes. Certain conflicts of interest involving the fund and its affiliates could impact the fund’s investment returns and limit the flexibility of its investment policies. This is not a complete enumeration of the fund’s risks. Please read the fund prospectus for other risk factors related to the fund.

The fund may not be suitable for all investors. Investors are encouraged to consult with appropriate financial professionals before considering an investment in the fund.

Companies that may be referenced on this website are privately-held companies. Shares of these privately-held companies do not trade on any national securities exchange, and there is no guarantee that the shares of these companies will ever be traded on any national securities exchange.

Diversification does not assure a profit or protect against a loss in a declining market.

The Private Shares Fund is distributed by FORESIDE FUND SERVICES, LLC.

For more Private Shares Fund news, please visit their directory page.