The launch of Destiny XYZ’s new fund took Wall Street by storm when it began trading at the end of March, offering day traders and casual investors a way to buy into the prestigious world of private companies.
But better access shouldn’t be confused for a good deal; before consumers go running to invest in the fund, called Destiny Tech100 (DXYZ), they need to be fully aware of the risks, the hype and the bubble they’re potentially buying into. (Note: Destiny XYZ is not affiliated with the wealth management company I founded, Destiny Family Office.)
Investment in the types of companies that Destiny Tech100 offers access to — 23 private companies that include headline grabbers like Elon Musk’s SpaceX and the payment platform Stripe — has historically been limited to only high-net-worth individuals. (The SEC has strict requirements to qualify to make such investments that start with a personal net worth of at least a million dollars.)
And that’s assuming the opportunity to invest is available. It rarely is, since these highest-profile private companies are usually funded by the highest-quality institutional investors and “in-the-club” high rollers. When an existing investor needs liquidity or the company is raising additional funds in a venture round, even the most savvy and wealthy investors can still have trouble buying a stake. In such cases, it’s often who you know that gets you a seat at the table.
Average investors can get in on it
So the key value proposition of the Destiny Tech100 fund is this: Average investors — who don’t have the funds or the access to buy into such high-flying private companies — can buy a stake in a closed fund and reap the benefits of the fund’s index.
A great solution, right?
Certainly, that’s how the market seemed to feel about it.
DXYZ sold more than $2 billion worth of shares in its first few weeks listed. At one point, the price had risen by 1,172% of its initial listing cost — underscoring the enormous demand for the fund’s offerings.
But demand for the offering, in this case, does not equate to the value of the asset itself. The fund is trading at massive premiums, up to 942% of the value of the underlying asset — a figure that would give any investor worth their salt pause. On top of this, investors have fees to pay to the fund — 2.5%, which may not be a huge fee relatively, but it still erodes returns over time.
A more complicated form of investing
The issue is that investing in private companies tends to be more complicated than traditional investing on the public market; the key difference being the lack of liquidity and transparency that exists when investing in private companies. Public companies are obligated to share investor reports, whereas private companies have no such obligation.
But unlike direct private investors, who may be able to sell their stake in a company on the secondary market, individuals who are investing through Destiny XYZ have no control on the underlying asset. This brings with it a host of questions about how things like liquidity events will play out when they do occur. Destiny XYZ’s leadership has said the value of the fund will be assessed on a quarterly basis, but that’s a hard thing to do when the true value of private companies is enormously challenging to calculate with any degree of accuracy.
Time is an issue as well
Investing in private companies also takes more time. Certainly, it’s possible that SpaceX or a spun-out Starlink goes public in the next year, but realizing the full value of a private investment can require years of patience — meaning money once invested has to stay there in order to be fully realized.
All of which is to say: Investors should proceed with caution. Investors need to go in with their eyes wide open and aware of the implications for their wealth and objectives — and in particular, look closely at the enormous premium the fund’s shares currently carry.
The hype over certain private companies — like OpenAI, one company in the fund — should not push investors into speculation. It’s that sort of mania and fervor that creates things like the dot-com bubble. Yes, there were winners in that race, but cumulatively, investors lost $5 trillion in that meltdown.
The coolness factor that’s driving the market right now is something that investors should be aware of. As an adviser, I think that the DXYZ fund is appropriately diversified, with 23 companies and more to come, but there are still a number of large questions about how the payout system will work. And that’s enough to have me pause — at least for now.
Patience is going to be key
The fear of missing out shouldn’t factor in in this case. The venture capital groups can all see: The demand for this sort of fund product is out there. DXYZ may be the first of its kind, but it’s highly unlikely that it will be the last. Patience is going to be key for investors, to allow the market to calm down and the tide to roll out. There’s little advantage to being a first mover here.
And if getting into a company like OpenAI is that important to you, there are other ways to reap that benefit. Microsoft (MSFT) owns a huge portion of OpenAI and is publicly traded and available. Those are stocks that will reap the eventual benefits of the work that’s being done — and ones that can be acquired for less risk than Destiny Tech100 can currently offer.
The world of private investing is complex and risky: Investors need to make sure they understand what their exposure is.
