Cathie Wood and ARK Invest closed out Q3 with the announcement of the ARK Venture Fund, a cross-over fund open to retail investors accepting commitments starting at $500. We fully support broadening access to private markets (our core business), but we have issues with how this is constructed and presented.
Fees
The Fund has a total expense ratio of 4.22%. This includes a 2.75% management fee, 0.65% distribution fee, and an additional 0.82% other operating fees. There is no carry, but it’s hard to justify a 4.22% fee relative to traditional funds, which according to the recent MJ Hudson Private Equity Fund Terms Research, had fund management fees in the 1.76% – 2% range. Assuming a 5.0% annual return (per the prospectus) over ten years, an investor would generate a 63% gross return. When factoring in the fees, the return drops to 19%, a 44% difference.
Focus
Investing in the private markets is very different from public markets, and investing in the early stage vs. late stage is also very different. Each strategy requires a unique skill set, and most managers have been unable to do both. “The Fund’s investments will include early- to late-stage private companies and micro-, small-, medium- and large-capitalization public companies. Under normal circumstances, the Fund expects to invest 20% – 85% of its assets in securities of private companies and the remainder of its assets in publicly traded securities.” A manager’s investment process & philosophy (two of Gridline’s four P’s of Manager Selection) must be well-defined and focused. This is a vast landscape to cover, analyze, and win the best opportunities in technology.
Liquidity
The fund is structured as an interval fund. This closed-end fund is not listed on an exchange but periodically offers to repurchase a limited percentage (between 5% and 25%) of outstanding shares. Interval funds are often touted as a liquid alternative to traditional VC & PE funds. Still, as the prospectus states, “it is expected that the Fund will offer to repurchase only the minimum amount of 5% of its outstanding Shares.” No matter the circumstances (poor performance, manager turnover, personal financial situation, etc.), only 5% of the fund can be liquidated per quarter, meaning it could take five years to get your money out.
We cheer innovation in private markets, but as with all investments, robust diligence and thoughtful analysis are required before committing. This new fund may be incredibly successful, and we hope it is for anyone who chooses to invest. Still, we stand firm in our belief that managers with unique perspectives, strong portfolio management skills, a well-documented investment process, and a high degree of economic alignment with investors are the key to winning in the private markets.
Worth a Read
Mitigating Adverse Selection in Investment Platforms
Investors need access to a range of high-quality opportunities that originate from a comprehensive market analysis. Read more.
The Benefits of an Investing Technology Platform
While old-school processes may have been enough in the past, today’s investors need a modern solution designed for the future of investing. Read more.
A Final Thought
According to the Preqin Special Report: The Future of Alternatives in 2027, the alternative assets industry will hit $23.3 trillion in AUM worldwide by the end of 2027, up from $13.7 trillion in 2021.
The forecasted 9.3% growth shows the strength of alternatives as an asset class, even with a low global GDP growth forecast of 3.2% this year and 2.9% in 2023.
It is expected that venture capital will be the fastest-growing asset class, increasing to $4.2 trillion in assets, followed by private equity, which is expected to reach $7.6 trillion by 2027.
As the denominator effect requires many institutional investors to throttle new private market allocations, much of the forecasted growth is coming from the retail investor market, reinforcing the growing demand for private market investment opportunities by individual investors and their advisors.
Let us know what you think – please don’t hesitate to reach out.
-The Team at Gridline