Not Just OpenAI: There Are More Pre-IPO Names to Watch

With so many people on the inside, it is no surprise that Members Only jackets are back in style.

Private companies have never been easier for everyday investors to get involved with. A wave of money has allowed companies to stay private for longer. Many companies that have not yet gone public, such as Anthropic and OpenAI, are attracting a lot of interest. “There’s more growth that’s accruing in those last two to three years before [private companies] become public that used to accrue to public markets,” said Laurence Russian, a portfolio manager at ABS Global Investments’ Pre-IPO and Growth Fund, a closed-end interval fund. “When people want access, people will create ways to give it to them.”

Private Works Department

Anthropic and OpenAI have attracted hundreds of billions of dollars in funding, and both have said they plan to go public within the next year. But fund managers and everyday investors are also excited about other companies, even though they receive less attention or may take longer to go public. Sources told Advisor Upside that they are keeping an eye on these companies:

• Payment processing company Stripe, which was valued at $159 billion earlier this year.
• In artificial intelligence (AI), investors are looking forward to possible public offerings from Databricks, Cognition and Positron AI.
• In aerospace and defense, investors are closely watching Anduril, Shield AI and Jeff Bezos’ Blue Origin.

Private companies that make defense technology are especially popular in the market where investors buy shares from other shareholders. But these investments are often hard to access, said Logan Henderson, CEO of Gridline. “If you’re in defense technology, there’s a lot of focus on who your investors are, especially for government-related contracts,” he added.

Everyday investors who do not meet the rules for accredited investors have a few ways to invest in these private companies. One way is through a special purpose vehicle, or SPV. This is a structure that pools money from different investors, including large institutions and smaller investors who are not accredited. David Shapiro, CEO of OpenVC, said this is the most common way for everyday investors to get access. Another option is to buy shares directly from the company as part of a new funding round. But this is harder because investors need connections inside the company and must usually invest much larger amounts of money, he added.

A third option is to buy an exchange-traded fund (ETF) that invests in or has exposure to the private company. But ETFs face limits on how much they can invest in private companies: exactly 15%, because the Investment Company Act of 1940 treats private investments as hard to sell quickly. There are also “hybrid” ETFs that take part in a company's funding round or buy SPVs.

Some of these ETFs invest the remaining 85% of their money in other companies connected to the private company they want to invest in, said Aga Kuplinska, head of product development at Tidal Financial Group. “[Issuers] look for proxies in order to target a certain company’s particular space, operating environment or ecosystem — unicorn suppliers,” she said. “They overlay the exposure of up to 15% with a thematic component, a group of companies that are highly correlated.”

Are You Open to Closed-End?

Last year, the Securities and Exchange Commission removed the 15% limit for registered closed-end funds, allowing these funds to invest more money in private companies. Examples include the Robinhood Ventures funds, which invest in private companies that are in the later stages of development or working on new, cutting-edge technology. Another example is Destiny Tech100 (DXYZ), a fund that holds shares in 100 private technology companies in later stages of development, including Stripe and Databricks. The problem is that these funds can trade for more than the net asset value (NAV) of the investments they hold. This means investors may pay more than those investments are actually worth just to get access to them. “The disparity between a NAV of $500 billion when the market cap of a fund is $2 billion would mean that you’re paying a huge premium just for the privilege of sitting in that liquidity,” Shapiro said. “Investors should be wary of that because these funds can often trade off of the hype of having Anthropic or one of these specific names.”

Interval funds also give investors access to private companies. However, investors must follow the fund's rules about when they can get their money back, said Ben Black, chief investment officer (CIO) of Powerlaw, which runs PWRL, a closed-end fund that invests in private companies. “The challenge is, you can [typically] only get 5% of your cash back every quarter, so it takes you five years to get your money out,” he said. “For some investors, that’s fine.”

When investing through SPVs, it can be hard to know exactly what you are buying. One SPV might own another SPV, with fees charged at each level, Russian said. “Somebody might create an SPV with a general partner that’s on [the capitalization table — a document listing every shareholder of a company]. They then might create another SPV for other investors to invest in their SPV,” he said. “Very often, they’ll layer fees into these different vehicles … some of them can be quite expensive.”

Tidal (Liquidity) Wave. As private markets become easier for everyday investors to access, Russian expects more interval funds to appear. He also expects large financial companies like Schwab to enter the business. Many companies preparing to go public are already well established and successful, he added. As a result, investments in these companies are starting to become a separate asset class of their own.

Investors should make a plan for what to do when the coming “wave of liquidity” arrives, said Tracy Gallagher, head of investment strategy at Allocate. “Do you plan to hold this position? How do you plan to diversify it?” she said. “Not necessarily a, ‘You must do this,’ but if you wait until that moment, you’re probably in a worse position to do anything intelligent or creative with the capital that’s coming back to you.”