hwang_jini
11月前
opinions are like a$ everyone got one and they all stink….nonetheless, this is decent (full text from the post below)
(Bloomberg Opinion)
Destiny
We talked yesterday about the Destiny Tech100 fund, but I worry that I did not sufficiently emphasize how wild it is. Here is what it is:
A guy named Sohail Prasad raised a fund to invest in hot private technology companies like SpaceX and Stripe.
It currently owns shares in about 23 private companies, worth about $52.6 million.1
Two weeks ago, it went public by a direct listing on the New York Stock Exchange under the ticker DXYZ, so that now anyone can buy or sell shares of the fund on the exchange.
This is an idea that lots of people have had: Wouldn’t it be nice to give ordinary investors access to hot startups? DXYZ is “providing everyday investors access to these private market leaders for the first time,” its website says. The New York Times said last week:
It is a problem that has vexed retail investors for years, as start-ups like Stripe, SpaceX and OpenAI soar to enormous valuations in the private market. Only so-called accredited investors with a high net worth are allowed to invest in private tech start-ups. By the time the companies go public a decade or more after they started, their growth has often slowed and their valuations are high.
A new fund, Destiny Tech100, is trying to change that with a novel solution.
Okay. But here is what is wild about it:
The portfolio is worth $52.6 million, give or take, or about $4.84 per share. That value is uncertain (it is based on subjective valuations, as the portfolio companies by definition do not trade publicly) and a bit stale (as of December), but it’s probably close enough.
The stock opened, in the direct listing, at $8.25 per share. It closed yesterday at $99.79 per share, for a market capitalization of almost $1.1 billion. (It’s down today.)
That is a 1,961% premium to net asset value.
That just seems very high? It is nice, in theory, to say that this fund gives ordinary investors access to startups before they go public and “their growth has often slowed and their valuations are high.” But with that premium, this fund gives ordinary investors access to startups at 20 times their current valuation. DXYZ advertises: “For many companies at the pre-IPO stage, there may be the potential to yield a 10-50x return.”2 But a 10x return on the entire portfolio would be a disaster for DXYZ investors, since then the portfolio would be worth something like $580 million, way less than its current market value. As I wrote yesterday, “if each of this fund’s holdings goes up 1,000% by the time they go public, people who bought into the fund today will lose money.”
Or to put it another way, if you buy shares in DXYZ, you are getting almost no exposure to Stripe and SpaceX; you are mostly getting exposure to DXYZ’s own premium. More than 90% of the value of the stock is premium; the portfolio is an afterthought.
What do you make of this? We do live in an age of meme stocks; I talk all the time around here about stocks that trade at prices that seem to be disconnected from their fundamental value. “This is a way for ordinary investors to get access to hot startups” is a good meme, whether or not it is true as a matter of arithmetic. If the only publicly traded way to get access to hot startups has $50 million worth of hot startups, there’s no law of nature that prevents it from trading at $1 billion. “The public listing of DXYZ has become a cultural moment that’s taken on a life of its own,” Prasad told me by email, which is a nice way to say it’s a meme stock.
On the other hand, what do I always say about meme-stock companies? I say they should sell stock. That trade actually works rather nicely here. DXYZ is an exchange-listed closed-end fund; it is not an exchange-traded fund. In an ETF, certain investors (“authorized participants”) can create and redeem shares of the fund: They can deliver a basket of the underlying portfolio to the fund sponsor and get back ETF shares, or they can deliver ETF shares to the sponsor and get back the underlying portfolio. This creates an arbitrage: If the ETF trades at a premium to its net asset value, arbitrageurs will buy the underlying assets, deliver them to the sponsor, get back ETF shares and sell them to capture the premium.3 (And vice versa, if it trades at a discount.) This drives down the price of the ETF (and drives up the price of the underlying assets), closing the premium. In liquid markets, this normally keeps the price of the ETF in line with the value of its portfolio.
That doesn’t work here, because DXYZ is a closed-end fund, not an ETF. Investors cannot create or redeem shares; they can’t put money in or take money out. The reason for that is pretty obvious: DXYZ doesn’t own a portfolio of liquid publicly traded stocks. It owns stakes in private companies; each investment has to be individually negotiated, and they can’t necessarily be sold quickly, or at all. DXYZ’s shares trade publicly and liquidly, but its underlying assets do not.
Still the basic idea still works: DXYZ should sell stock!4 So much stock. It should sell stock to the public at a 1,000% premium to its net asset value or whatever, and then use the money to invest in more stakes in more private companies. If you do enough of that, then:
You collapse the premium: Selling stock and buying the underlying assets will move the price of the stock closer to the price of the underlying assets.
You average into the valuation. Right now DXYZ has, call it, $1 billion of stock and a $50 million portfolio, a 1,900% premium. If it sells another $1 billion of stock, and invests the proceeds into new private-company stakes, it will have $2 billion of stock and a $1.05 billion portfolio, a 90% premium.5 Progress!
There are some limits on this: DXYZ doesn’t just have to raise the money; it also has to deploy it, to find good private companies (or their shareholders) who are willing to sell it shares at reasonable valuations.
But that is a problem for any venture capital fund, and DXYZ is in some ways in a very nice position. For one thing, regular venture capital funds are looking to sell shares in the secondary market. And while other venture funds sometimes struggle to raise money from institutions, DXYZ already knows that there is a ton of demand from public shareholders to invest more in its fund. The market price tells it that
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