Tuesday, April 23, 2024

The public market’s new hot thing: private companies

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Apr 23, 2024 View in browser
 
POLITICO Morning Money

By Declan Harty

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QUICK FIX

Washington policymakers have been squabbling for years over how much access everyday people should have to the lucrative but dicey world of private market investing.

Sohail Prasad thinks he may have cracked the code. Prasad is the CEO of Destiny, the firm behind one of Wall Street’s most talked about funds: the Destiny Tech 100, which is often known by its ticker, DXYZ. Its selling point? The fund almost exclusively holds shares in large private tech companies like SpaceX, OpenAI and Stripe that otherwise would be out of reach for most investors.

“Twenty-five years ago, people had access to many of these [types of] companies,” Prasad told MM. “It’s about providing access to these companies that are changing the world as we know it, letting individual investors have ownership in these companies but doing so with the liquidity and protections of the public markets.”

Private company investing in the U.S. is largely done behind closed doors by financial behemoths, sophisticated investors and the rich, who can usually handle the high stakes of wagering on fledgling ventures that often crash and burn — but sometimes strike gold.

But companies for years have been opting to stay private for longer, a phenomenon partly driven by the amount of cash available in the private markets and the degree of scrutiny that comes with going public. In turn, some lawmakers, regulators and business groups caution that individual investors, whose investments are largely limited to the public markets, are being unfairly shut out from companies that could be the next great Silicon Valley giants.

Now, DXYZ is beginning to reignite the debate over the tradeoffs of private market investing, with some in Washington warning of the dangers of plowing money into companies whose financials and operations are largely clouded from public view.

“A publicly traded product composed of heavily hyped, opaque, illiquid assets is likely to attract a ton of attention from regulators and plaintiffs’ lawyers,” said Tyler Gellasch, CEO of Healthy Markets Association, an institutional investor advocacy group. “The securities laws are intended to ensure public market investors have detailed information about companies’ operations, financials, governance and risks when they’re making their investment decisions, and this type of product is facially designed to avoid those laws. You have to ask yourself why.”

DXYZ holds shares in 23 private companies with plans to grow that to 100. (Elon Musk’s SpaceX represents its largest position at about 35 percent of the portfolio.) Prasad said DXYZ acquires the shares through a mix of different means such as primary fundraising rounds, private stock marketplaces and, in some cases, agreements with existing shareholders to acquire their shares when the company goes public.

The fund is not the first or only vehicle that offers individual investors a chance to buy into private companies, but it has taken the market by storm since debuting last month. Its stock is up about 200 percent — and that’s after skyrocketing to more than $100 a share before crashing back down as the overall market declined. As of Monday’s close, DXYZ was trading at $24.69

“Unsurprisingly, retail investors want the same private market opportunities as institutional investors like state and local pension plans,” SEC Commissioner Mark Uyeda said in a statement. A Republican, Uyeda added that the SEC should particularly consider expanding private-market access to fiduciary-advised funds.

DXYZ’s rise has the stock trading at a significant premium over the value of the fund’s underlying holdings, which was last disclosed to be about $5 per share at year-end. But Prasad attributes the stock’s gyrations to “a discovery market” where investors are trying to figure out how to value the fund.

As for the companies underlying the fund, Prasad said DXYZ targets those that would already be publicly traded at another period in time. The fund picks its holdings based on a slate of criteria, he added, including whether they have been vetted and financed by U.S. institutional investors, whether they have a burdensome debt load and any cultural red flags.

"Most of these companies are not two guys in a living room with an idea,” Prasad said.

IT’S TUESDAY — Be sure to send any tips to MM host Zach Warmbrodt at zwarmbrodt@politico.com. And if you want to talk about public and private markets, I’m at dharty@politico.com.

Driving the Day

The Bipartisan Policy Center hosts Acting HUD Secretary Adrianne Todman at 10 a.m.

FIRST IN MM: Crypto groups sue over SEC’s dealer rule — The Blockchain Association and the Crypto Freedom Alliance of Texas sued the SEC this morning in a bid to knock down a new rule dialing up regulatory scrutiny on so-called dealers in the financial markets.

In the lawsuit, which was filed in the Northern District of Texas, the groups alleged that the SEC did not “substantively” engage with questions and concerns about how the rule would apply to the cryptocurrency industry, according to a statement shared with MM. They also claimed the rule risks roping in market participants who don’t resemble dealers “as the term has been understood for decades.”

The SEC finalized the rule earlier this year in a push to fold in more trading firms under its direct oversight. Hedge fund groups sued to challenge the rule in March.

‘No analogue in history’  — From our Derek Robertson: “The TikTok bill that passed the House over the weekend isn’t just a high-profile shot at an ultra-popular app — it’s a historically unusual move that in itself could create problems for the law.

“By naming a single company, and by seemingly reversing the U.S.’ longstanding policy on data and the open internet, it calls into question how the law would be enforced, exactly what it will change and whether it can survive a Constitutional challenge.”

 

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Fly Around

Late-night trading at NYSE? — The New York Stock Exchange is beginning to gauge the market’s appetite for trading around the clock, the FT reports.

EU eyes bank rules — From our European colleague Kathryn Carlson: “In an interview, José Manuel Campa, the head of the European Banking Authority, said the EU will consider what it has “to do going forward if there were to be delays in implementation [of a controversial new capital rule], either by the U.S. or the U.K.” He didn’t specify what actions were under consideration.”

New flood rule — Our Zack Colman reports that the Biden administration on Monday rolled out a final flood protection rule for federally backed housing in a push to limit property damage from flooding. The rule could also help lower insurance premiums and prevent development in risky areas, supporters say.

At the regulators

DEBT Box fallout — Bloomberg reports that two SEC attorneys resigned after a federal judge sanctioned the agency over how the agency handled its case against the crypto platform DEBT Box.

 

POLITICO IS BACK AT THE 2024 MILKEN INSTITUTE GLOBAL CONFERENCE: POLITICO will again be your eyes and ears at the 27th Annual Milken Institute Global Conference in Los Angeles from May 5-8 with exclusive, daily, reporting in our Global Playbook newsletter. Suzanne Lynch will be on the ground covering the biggest moments, behind-the-scenes buzz and on-stage insights from global leaders in health, finance, tech, philanthropy and beyond. Get a front-row seat to where the most interesting minds and top global leaders confront the world’s most pressing and complex challenges — subscribe today.

 
 
Crypto

SBF to the rescue — CoinDesk reports that convicted crypto fraudster Sam Bankman-Fried has agreed to a preliminary settlement deal with some FTX customers. The customers reportedly agreed to drop a lawsuit against the one-time CEO for his help in going after celebrity boosters and venture capitalists who once backed the crypto exchange.

Bitcoin sign guy looks to cash in — A legal pad with “Buy Bitcoin” on it that famously popped up behind then-Federal Reserve Chair Janet Yellen during a congressional hearing in 2017 is open for bidding, Bloomberg reports. Bids were coming in at more than $141,000 on Monday evening.

 

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