Unlocking retail investment in the private markets

Amidst an otherwise slow closed-end fund IPO market, a new fund – Destiny Tech100 Inc. (DXYZ) – has garnered industry attention and a significant premium for its stock.

In fact, to say that DXYZ’s premium was “significant” is an understatement. In its first days of trading, the stock’s market price on the New York Stock Exchange reached nearly $100 per share while its net asset value (NAV) per share was approximately $5 – a premium of well over 1000%.

Shares of most closed-end funds historically trade at a discount to their NAV, so what makes DXYZ so attractive to investors? While funds can trade at a premium or discount for many reasons, DXYZ’s marketing of itself as “providing everyday investors access to…private market leaders for the first time” is likely responsible for the hype. 

Retail investors are increasingly demanding access to the private markets, which has historically been limited to investors that meet the “qualified purchaser” standard (as defined in the Investment Company Act of 1940) required by most private funds. DXYZ seeks to provide investors exposure to “a portfolio of 100 of the top venture-backed private technology companies” including companies such as SpaceX, OpenAI, Stripe and Instacart.

To provide this exposure, DXYZ seeks to acquire these companies’ stock in a secondary market or to enter into forward contracts with stockholders (primarily startup employees) who have agreed to transfer their shares to DXYZ when their employer takes the company public (in many instances, a private company will place restrictions and/or rights of first refusal on transfers of its stock, often requiring the company’s consent to these forward contracts).

Venture and growth fund sponsors looking to capitalize on this demand have a number of options for how to do just that. Aside from the listed closed-end fund model like DXYZ, sponsors may wish to explore unlisted closed-end funds such as interval funds and tender offer funds.

These alternative retail products provide significantly more flexibility than traditional mutual funds to invest in illiquid assets like private companies and, in many cases, can be offered to retail investors without financial or sophistication requirements, including through large distribution platforms like Fidelity or Schwab. While sponsors of alternative retail products must comply with the Investment Company Act and related rules and SEC guidance, we increasingly see sponsors deciding that the ability to raise capital from a broader investor base outweighs the regulatory and compliance burdens which may have deterred them from pursuing such products historically.

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