Individual investors eager to invest in companies like SpaceX, OpenAI, and Anthropic PBC are frantically purchasing shares of funds that invest in the hottest private market companies, thereby driving up their prices. The share prices of these funds have surged to extremely high premium levels, raising concerns about overvaluation and the risks faced by investors. The assets held by these funds are sometimes acquired through Special Purpose Vehicles (SPVs) or forward contracts, transactions that can carry counterparty and execution risks. Furthermore, related companies like OpenAI have issued warnings, stating they may not recognize the validity of such transactions.
Last month, the premium for one closed-end fund skyrocketed to approximately 3000% of the value of its underlying assets. The allure of tech companies has ignited a fervent pursuit among retail investors, reminiscent of the "meme stock" craze. For the sellers of these funds, the opportunity is also rare. As tech companies rapidly advance towards Initial Public Offerings (IPOs), the advantage of this exclusive access is likely to vanish soon. This represents the latest example of speculative inflows into private markets, with a growing number of amateur investors diving into often opaque and illiquid assets without fully understanding the risks.
Previously, given overall turbulence in the private markets, valuation issues have been particularly worrying, unsettling some investors and leading funds to restrict redemptions. Entities like Fundrise Innovation Fund LLC and Robinhood Ventures Fund I claim they provide access to investment targets traditionally available only to venture capital and institutional investors. They state they are democratizing the market, leading consumers into a "secret room" filled with new investment opportunities. Another fund, Powerlaw Corp., also plans to go public and is currently awaiting approval from the U.S. Securities and Exchange Commission (SEC).
These closed-end funds hold shares in well-known tech companies and offer retail investors the chance to participate by purchasing fund shares when the fund itself lists. Owen Lamont, a portfolio manager at Acadian Asset Management, commented, "It's reasonable for funds to list before the tech companies go public themselves; they should list when the underlying assets are scarce, not abundant." Some funds bill themselves as venture capital firms for the public markets. However, instead of investing in early-stage venture capital, they bundle shares of late-stage, pre-IPO companies into baskets.
The average cost for four funds investing in prominent tech companies, including management and other fees, is 3.6%. The soaring share prices of some funds have sparked worries about overvaluation and whether investors are paying an excessive price for a form of "tenuous connection" to hyped companies. Retail investors also face counterparty and execution risks. Some fund holdings are acquired through Special Purpose Entities or forward contracts. OpenAI has been critical of these transactions, warning it reserves the right to invalidate them and even cancel the related shares.
For closed-end funds, a key metric is the value of their stock portfolio, known as the Net Asset Value (NAV). Because the number of shares is fixed, a fund can trade at a price above or below this NAV. After Fundrise listed its Innovation Fund, the fund's shares traded at nearly 30 times its latest NAV from the end of February. If the same multiple were applied to the valuation of each portfolio company, for instance, based on SpaceX's February valuation of $1.25 trillion, its market capitalization would approach $40 trillion. Lamont questioned, "Is it possible for SpaceX's price to rise enough to justify the premium? It's possible, but highly unlikely."
Fundrise, which previously focused on real estate investments before pivoting to tech, stated its mission is to "democratize the private markets." In February, at the Innovation Fund's first investor day, CEO Ben Miller used similar language, with a screen behind him displaying: "The arc of finance is bending toward democracy." Prior to the fund's IPO, some investors were skeptical of the move, fearing "violent fluctuations" in the share price. For example, Fundrise began trading on March 19 at $31.25 per share. Investors flocked to it, driving the price to a peak of $575 on March 25. This represented a 3000% premium over the NAV of $18.26 per share at the end of February. Subsequently, short-sellers published reports highlighting the fund's excessive premium, leading to a price decline. Citron Research estimated the fund's fair value at around $26 per share; it currently hovers near $85.
On Fundrise's Reddit forum, these moves were debated, with some sarcastically referencing "AI hype" and "absurdity." Jack Shannon, an analyst at Morningstar, remarked during the price surge, "If you buy Fundrise at a 2000% premium, your only hope is that someone else will be foolish enough to buy it at an even higher premium. It's like a game of hot potato. They're all thinking – I don't want to be the last one holding it." One professional investor noted that for those who bought at the peak, "It's like the GameStop (GME.US) event all over again. People are just chasing the price blindly, with no real idea what they're doing."
Another closed-end fund, Robinhood Ventures, also went public in March. Its premium was less dramatic than Fundrise's; its shares currently trade at a premium of about 47%. Destiny Tech100 Inc, which went public in 2024, also saw its shares reach a premium of nearly 2000% in the initial weeks after listing. Currently, the fund's shares trade at a premium of approximately 49%.
Investing indirectly in popular AI companies carries risks. For some funds, gaining exposure to a portfolio company like OpenAI is not straightforward. While many institutional investors hold shares in large startups directly, other investors, including Fundrise, must find alternative routes. One method is to purchase shares in a Special Purpose Vehicle (SPV) alongside numerous other investors. These SPVs, not the fund itself, hold the company shares directly. Sometimes, SPVs may involve multiple layers of structure. According to SEC filings, at least 42% of Fundrise's fund holdings are held through SPVs. Filings for Powerlaw, another closed-end fund awaiting listing approval, show that 86% of its investments are also held via SPVs. A spokesperson for Robinhood Ventures stated that so far, it has only purchased shares directly from the companies or existing investors, all through secondary market transactions.
In other instances, these funds acquire shares through forward contracts—agreements with startup employees or shareholders promising future delivery of shares. When asked about closed-end funds marketing their shares, OpenAI stated it does not endorse or participate in any transactions such as SPVs, forward contracts, or tokenized equity. The company also warned that such activities could lead to the "underlying equity being invalidated." Acadian's Lamont concluded, "This is a case where closed-end funds claim to have legal contracts for the underlying shares, but the issuer disputes that."
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