Index Fund for Private Firms Makes Backing Unicorns Easier
(Bloomberg) -- Qualified investors looking to tap the growth of privately-held companies now have a way to simplify the dilemma of which unicorns to back. There’s an index fund for that.
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Forge Global Holdings Inc. partnered with Boston-based asset manager Accuidity LLC to launch on Tuesday the first fund based on an index that tracks the performance of 60 of the most liquid late-stage, venture-backed private companies including SpaceX, Cerebras Systems Inc. and Databricks Inc., according to the San Francisco-headquartered infrastructure and data provider.
The Accuidity Megacorn Fund, announced in December, lets accredited investors spread the risk of investing in unlisted firms, which can be less transparent about their finances than public companies. With the market for initial public offerings having slumped in recent years, investors are keen to capture the growth that many such private firms have been steadily delivering ahead of potential listings.
“Companies used to go public much earlier in their life cycle and they’re now staying private for longer, keeping the access out of the public market,” Accuidity founder and co-president Vince Gubitosi said in an interview. “In addition to that, we’re seeing that companies like Forge could provide a marketplace for employees and early investors to transact in their shares.”
Similar to public indexes like the S&P 500 or the Nasdaq Composite, the Forge Accuidity Private Market Index on which the fund is based is market capitalization-weighted. SpaceX with its $225 billion valuation is the largest holding in the index with a 6.41% weight, followed by Stripe Inc. and Epic Games Inc.
An index fund “is the gateway to get more assets coming into the space,” said Howe Ng, executive vice president of innovation and investment solutions at Forge Global, drawing a comparison with how Bitcoin exchange traded funds have drawn assets into the cryptocurrency space.
The launch of the index fund, which may accept as much as $2 billion worth of investment initially, comes at a time when the IPO market recovery is still tentative. A crop of IPOs in recent weeks has helped improve sentiment, after successful debuts by social media platform Reddit Inc. and semiconductor connectivity company Astera Labs Inc., both of which traded higher following their listings.
It also comes as private market investors are warming up again to taking stakes in unlisted unicorns, despite the constraints of not being able to freely trade them.
A private market survey by investment bank Houlihan Lokey Inc. polling 60 growth investors managing $2 trillion of assets found that a majority of the respondents believe the private investment cycle has passed the bottom, and that the market currently presents a somewhat or very attractive opportunity. Valuations are set to be in line with or higher than those offered in the second half of 2023.
To be sure, the new index fund isn’t for everyone, catering to qualified investors with a net worth of at least $5 million. There is a minimum ticket size of $250,000.
The market-cap weighted Forge Accuidity index turned positive this year and has indicated a return just shy of 2% so far. That’s slightly lower than the 4% increase recorded by Forge’s equal-weighted Private Market Index, which benefited from a rally in Reddit and Astera Labs shares before they went public.
Read More: Private Company Index Flips Positive as IPOs Return
Forge and Accuidity’s private index fund is only the beginning of a slew of products linked to private-market trading, Forge’s Ng said.
“This is just the first product geared towards democratizing the private market. It’s important to note that it’s not just a one trick pony,” Ng said. “But there’s the liquidity issue to resolve. It took Bitcoin many years to solve that, it’ll take less time for private market assets.”
(Updates with detail from report in ninth paragraph. A previous version corrected the name of the fund in third paragraph and the implied returns of Stripe and Databricks in the chart.)
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