(Bloomberg) — The euphoria in Meme shares turned a closed-end fund into a billion-dollar behemoth this week, freeing it from the stated valuations of its private holdings.
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Now, its creator says that it is all part of a “discovery process” among investors trying to find out how much their unlisted technology companies are worth.
(ticker DXYZ), which holds shares in beloved unicorns like Elon Musk’s SpaceX and Sam Altman’s OpenAI, briefly surpassed $1 billion this week. This compares to its net asset value of $54.3 million, based on its most recent regulatory filing.
Its rapid rise has drawn flashbacks to the meme stock frenzy of 2021, especially after the gain caused its price to be many times the stated value of its holdings. While it is not uncommon for closed-end funds to deviate from the value of their underlying constituents, Destiny’s case has little precedent in the U.S. market.
The fund, which priced its positions in 23 companies at $4.84 per share in that filing, changed hands at $52.02 at 11:53 a.m. New York time, a gain of nearly 500% since its late listing of March.
“We’ve been in the market for two weeks, and over time the market is discovering, ‘Wow, for the first time you can access this type of company,’” said Sohail Prasad, chief executive of Destiny. XYZ in an interview with Bloomberg Television. “There will be more participants in the market and more stability over time.”
Structured like a closed-end fund that tends to keep the number of shares outstanding fixed, DXYZ is theoretically able to command a premium when demand is high and fall to a discount when it is low. At least for now, investors have demonstrated a persistent willingness to pay for their underlying assets.
The Destiny fund’s huge premium stands out in an industry whose asset values are typically ignored by investors. Closed-end funds often trade at a discount, a pattern that has led hedge fund managers to bet on lowering the limit. For the average closed-end fund, the discount stood at 7.5% at the end of March, according to data compiled by Morningstar Inc., with just 14% of funds earning a premium over net asset value.
“The problem with closed-end funds is that they can be extremely inefficient at pricing,” said James Seyffart, ETF analyst at Bloomberg Intelligence. “So you can get significant prizes, which is probably what’s happening now. But it could also, in the future, generate significant discounts.”
The Destiny fund is among the first public investment vehicles that allow small investors to tap a lucrative but risky market that until now has been reserved mainly for large money managers and wealthy individuals.
Prasad started Destiny Tech100 in late 2020 to acquire stakes in private technology companies. The fund began acquiring the majority of its assets in 2021, spending $77.4 million on its US investments. This was a potentially risky period, when speculative technology stocks plummeted on public exchanges. In December, these holdings were valued at US$50.8 million, representing a 34% loss.
Last year alone, the fund fell 7.3%, significantly lagging the Nasdaq Composite Index’s 43% gain. In an annual report to shareholders, Prasad attributed the shortfall to liquidity limits and a wide bid-ask spread that prevented private companies from benefiting from a revaluation of asset prices as a result of higher interest rates.
Prasad, a Carnegie Mellon University dropout, has spent most of his career in the world of private investment. He founded Forge Global Holdings Inc. in 2014, a trading platform that went public about eight years later through a partnership with a blank-check company led by Blythe Masters, the former JPMorgan Chase & Co executive. . .
“A ton of founders” of unicorn companies have reached out in recent weeks seeking to be included in DXYZ, according to Prasad. Aiming to increase the number of holdings to 100 over time, he sees “massive” growth potential in the niche market that bridges the gap between public and private markets.
“There will be a lot of people in the industry who are looking at this right now. Being like this only has the potential to be a better product for the enterprise”, he said. “In the long term, it is not just individual retail investors, but also institutions that can have a liquid product that invests in private markets.”
(Update with fund history from seventh paragraph.)
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