Destiny Tech100 (NYSE: DXYZ) recently debuted on the New York Stock Exchange and swiftly became one of the hottest 'meme stocks' on social media platforms like X (formerly Twitter) and Reddit. Its share price shot through the roof, lifting its market capitalization to over a billion dollars within just two weeks post-launch, before eventually dropping to just over a third of that value as of Friday 12th of April.
The initial buzz for the stock largely stems from DXYZ's focus on offering investment opportunities in high-profile, private technology companies, a sector typically reserved for institutional investors or high-net-worth individuals.
What is DXYZ and How Does it Differ from ETFs?
DXYZ is a closed-end fund (CEF), which is different from the increasingly popular exchange-traded funds (ETFs) vehicles. While both CEFs and ETFs are traded on stock exchanges, CEFs are unique in that they issue a fixed number of shares at an initial public offering (IPO), after which the fund is closed to new investment. This contrasts with ETFs, which continuously issue and redeem shares and generally maintain a price closely aligned with their net asset value (NAV).
What does DXYZ Invest in?
DXYZ invests in private technology firms such as SpaceX, OpenAI, Epic Games, Discord, Superhuman, and Stripe. Although the fund aims to hold shares in 100 companies, it currently holds 23, each chosen for its potential and stability.
Despite the fund's attractive portfolio, a significant concern has emerged regarding DXYZ's market capitalization, which has soared to nearly 10 times its net asset value. This discrepancy has raised questions about the sustainability of its share price and the speculative nature of the investments driving its market performance.
Understanding Private Equity
Private equity refers to owning shares or having an interest in companies that are not listed on public stock exchanges. This type of investment comes mainly from firms that acquire significant stakes in private companies or from wealthy individuals aiming for higher-than-average returns. They might also take over public companies with the intention of removing them from the stock market.
The private equity sector includes big institutional investors like pension funds, as well as major private equity firms backed by accredited investors. Investing in private equity usually requires a substantial amount of money because it often involves taking a controlling interest in a company's operations, so it's an arena typically ruled by those with deep pockets.
The State of Private Equity Markets
According to a Harvard Law School report, the private equity (PE) market in 2023 faced significant challenges from rising interest rates, persistent inflation, and valuation uncertainties, which continued from the previous year.
Despite these obstacles, PE demonstrated resilience as dealmakers employed innovative financing solutions and strategies, transitioning from traditional buyouts to offering a broader range of capital solutions. This adaptability was evident in their best fundraising year on record for buyout strategies, though overall fundraising and deal activity declined.
Looking ahead to 2024, the PE market outlook is mixed. There's cautious optimism for an uptick in activity due to potentially more favorable borrowing conditions as interest rate hikes are expected to wane, and recession fears may subside.
However, the unpredictability of market conditions, including the ongoing adjustments to valuation expectations and economic forecasts, suggests that PE firms will need to maintain flexibility and strategic foresight to capitalize on opportunities.
How to Invest in Private Equity Markets with ETFs
With potentially favorable conditions in the private equity markets, investors can access key industry players through ETFs. The Invesco Global Listed Private Equity ETF (PSP) and the ProShares Global Listed Private Equity ETF (PEX) offer opportunities to indirectly invest in the private equity sector.
These ETFs provide exposure to firms, including business development companies (BDCs), master limited partnerships (MLPs), and other entities primarily focused on investing in, lending capital to, or providing services to privately held companies.
Private equity ETFs provide alternative routes for U.S. investors to engage with private equity markets, potentially mitigating the risks associated with the high market valuation disparities seen in CEFs like DXYZ.
PSP is the largest one with $240 million in AUM and has been trading since 2006 on NYSE ARCA. It tracks the Red Rocks Global Listed Private Equity Index and holds as of April 11th, 2024, shares of 69 firms like 3i (LON:III) Group PLC, EQT AB, KKR & Co, and Blackstone (NYSE:BX) among others. PSP has an expense ratio of 1.06%.
On the other hand, PEX, which oversees just under $10 million in assets, aims to replicate the performance of the PX Direct Listed Private Equity Index. Launched in 2013, the fund provides investors with exposure to 30 companies whose primary business is direct investments in private enterprises. However, owning shares of PEX comes at a higher cost than PSP, charging an expense ratio of 3.49%.
Another fund, which launched late last year, is the WHITEWOLF Publicly Listed Private Equity ETF (LBO). LBO is an actively managed, income-oriented fund that offers investors exposure to the leveraged buyout ecosystem. This ETF invests in publicly listed private equity buyout firms, sponsors, business development companies (BDCs), leverage providers, and related asset managers. LBO has an even higher expense ratio than PEX, standing at 6.82%.
This content was originally published by our partners at ETF Central.