A Note on Private Investment
.webp)
By Ben Dolan, CFP®
Late last year I blogged about the ubiquity of alternative investments. This past weekend, Jason Zweig, columnist at the Wall Street Journal, published a piece specific to the pre-IPO equity market. This is a flashy and splashy segment of privates…think OpenAI, Anthropic or any other private company leading the headlines.
Less well known is the process of acquiring pre-IPO equity. Warning, it’s not pretty. According to Zweig, the most common route used by investors to access private shares is through a special-purpose vehicle (SPV). While they may not have a monopoly on access, being the most popular tool in an opaque market can lead to perverse incentives. Here’s Zweig: “SPVs can bear upfront fees that could hit 5% to 12% or more, say industry executives…The highest costs are hard to overcome, says Tom Callahan, chief executive of Nasdaq Private Market. “You better hope that company 10X’es or your return will be eroded away in fees,” he says.”
But that’s just the buy side. Once you are in the investment, there could be ongoing management fees to hold the position. Ready to sell? Not so fast, as “some vehicles explicitly warn that you might never be able to sell” as no secondary market may exist post-purchase. In the chance you can sell the investment, according to Zweig’s research on SPV provider Hiive, you’ll pay a commission of 4.9%. If you can sell, and made a profit (far from guaranteed), some SPVs charge a performance fee of 10% to 30%. Let’s break it down:
- Entry fees
- Holding fees
- Exit fees
- Performance fees
- Taxes (don’t forget about these)
Zweig goes on to detail the mind-numbing scheme of another company promising to “mirror” the returns of certain private companies through a debt obligation entitling you to tokens that track returns of the investment (with fees at every step). In short, when entering this investment arena, you must watch for fees…and GRIFT!
All of this reminds me of a quote by the late great Charlie Munger who, in conversation with a businessman he didn’t care for, asked him how he made his money. The executive replied, “on the top, on the bottom, and in the middle.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data are historical and are no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.
Nothing in this material should be construed as investment advice offered by Dolan Capital Advisors, Inc. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction, or investment strategy. No chart, graph, or other figure provided should be used to determine which securities to buy, sell or hold. No representation is made concerning the appropriateness of any particular investment, security, portfolio of securities, transaction, or investment strategy. You should speak with your own financial professional before making any investment decisions.
Past performance is not indicative of future results. Dolan Capital Advisors, Inc. does not guarantee any specific outcome or profit. These disclosures cannot and do not list every conceivable factor that may affect the results of any investment or investment strategy. Risks will arise, and an investor must be willing and able to accept those risks, including the loss of principal.
Certain statements contained herein are statements of future expectations and other forward-looking statements that are based on opinions and assumptions that involve known and unknown risks and uncertainties that would cause actual results, performance, or events to differ materially from those expressed or implied in such statements.
Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors, Inc., a SEC-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.