Private equity and venture capital firms typically have access to investments that are not available to everyday investors. Why? Well, to put it simply, these funds raise capital from ultrahigh-net-worth individuals called accredited investors.
In turn, large investment firms gain access to opportunities that aren't typically found on public exchanges. The catch is that these opportunities are highly risky -- so they're only available to investors who attain a certain threshold of income or net worth.
Nevertheless, investing in start-ups can be extremely appealing. A new exchange-traded fund (ETF) called the Destiny Tech100(NYSE: DXYZ) could represent a unique chance for retail investors to mimic the activity of venture capitalists. Let's dig into the fund, and assess whether investing like a billionaire is right for you.
What's in the fund?
The term "unicorn" is used to describe a private company that has a valuation of at least $1 billion. Naturally, unicorns are generally desirable investment opportunities. The challenge is that gaining access to these investments is reserved for the ultrawealthy. The majority of investors don't have a chance to participate until a unicorn pursues an initial public offering (IPO).
This where the Destiny Tech100 fund comes in. According to the company's filings, the portfolio managers of the fund have a long-term goal of investing in 100 venture-backed technology companies. Currently, the fund has investments in 23 businesses.
Some of the more notable positions in the portfolio include fintech start-ups Klarna, Revolut, Plaid, Public.com, Brex, and Stripe. The fund is also an investor in Epic Games -- the developer of popular video game Fortnite. But perhaps most exciting is the fund's largest position -- Elon Musk's SpaceX.
Clearly, the Destiny Tech100 provides you with the most sought-after private technology investments in the world. But before diving in, let's explore how investing like a billionaire has looked over the last couple of years.
Image source: Getty Images.
How has Destiny Tech100 performed?
2023 was an incredible year for the technology sector. Excitement around artificial intelligence (AI) fueled investor activity, leading to a 43% surge in the tech-heavy Nasdaq Composite Index last year. Indeed, the Invesco QQQ Trust -- an ETF comprising members of the Nasdaq-100 index -- soared 54% in 2023 and is up another 5% so far this year.
By comparison, the Destiny Tech100 generated a return of negative 7.3% in 2023. Despite its high-profile portfolio of technology start-ups, the fund dramatically underperformed the broader tech sector.
It's important to realize that the Destiny Tech100 was not trading on public exchanges in 2023. In fact, shares didn't hit the New York Stock Exchange until earlier this year.
Since going public about a month ago, the stock has risen close to 1,000% -- from $9 to as high as nearly $100. However, over the last couple of weeks, trading activity has cooled off and shares now trade for a more modest price of about $43 each.
It takes money to make money
An important detail to point out is that the Destiny Tech100 is a closed-end fund. This means it is "closed" to raising capital from new investors and therefore will not issue new shares. As of Dec. 31, the net asset value (NAV) of the fund's holdings was $52.6 million. Given the fund's market cap is currently around $363 million, this means investors are paying $6.90 for every $1 of NAV. In other words, the value of the portfolio would need to rise by a factor of 6.9x before investors who buy at current prices make a return. While the valuation of a start-up can rise dramatically, it may take a long time to recognize meaningful gains.
There are a couple of important themes to unpack here. First, while investing like a billionaire may look appealing on the surface, the volatility of the Destiny Tech100 undermines how risky these types of investments can be. Another nuance is that just because a start-up has achieved unicorn status, that doesn't mean it's a safe investment.
Just as with public companies, valuations in start-ups can fluctuate. In fact, both Klarna and Stripe have witnessed substantial declines in valuation over the last couple of years. Both companies operate in fintech and are highly sensitive to the macroeconomy. Given unusually high inflation and rising interest rates that have been primary themes of the economy for the last couple of years, it makes sense that these businesses in particular were negatively impacted.
The last point to note is the management fee associated with the Destiny Tech100 fund. With an annual rate of 2.5%, Destiny Tech100's fees are definitely more akin to those of typical venture capital or private equity firms. By contrast, Invesco QQQ has an expense ratio of just 0.20%.
These are all reminders that investors need to focus on a long-term time horizon. Just because someone is an early investor in a hot start-up, that doesn't mean they reap profits as soon as the company scales up.
While the Destiny Tech100 fund is intriguing, investing in start-ups like a billionaire may not be as rosy as it looks. Although all of the fund's holdings have achieved unicorn valuations, many of these businesses are still unproven and may be considered more risky than comparable opportunities on public exchanges.
Before investing in the Destiny Tech100, I would encourage you to think long and hard about your time horizon, and about its high fees for managing your money compared to alternative options.
Should you invest $1,000 in Destiny Tech100 right now?
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
