Kevin Moss 00:10
Welcome everybody. My name is Kevin Moss and I'm the chief operating officer of SP Investments Management and the portfolio manager for the SharesPost 100 Fund. We're here live today at the SharesPost offices in San Francisco. Joining me is Christian Munafo, who's our new chief investment officer, and we're going to get you to know him today, but before we get started, let me set the agenda for this call. Since it's a 30-minute call, we want to make it as productive as possible. First, we're going to be introducing you to Christian, and we're going to hear from him about his background and his thoughts on the venture and private equity space. Then we're going to give you an update on the SharesPost 100 Fund, which I'm sure you're all anticipating. Then we're going to go back to Christian and he's going to talk about the macro environment and how that affects venture and private equity. And then, of course, at the end, we want to leave time for questions. If you look at the bottom right hand of your screen, there's a text box that you can ask questions throughout the call, and we'll try to get to as many as we possibly can. For those that we don't get to, we'll be following up with you directly to make sure all of your questions are answered. So, that being said, Christian, welcome. We're really happy to have you on the team. I think everybody on the call is really looking forward to hearing about your background and your thoughts on the venture and private equity space.
Christian Munafo 01:27
Great. Thanks, Kevin. It's great to be here with you, and I'm very excited to have this opportunity to introduce myself to many of our investors and advisors. That said, I do look forward to meeting with many of you in person as well in the coming weeks and months. A brief background, I started my career in investment banking, focused primarily on technology-oriented mergers and acquisitions. I made my foray into the private market, particularly private equity secondary markets, back in 2005. So I've essentially spent the last 14-plus years working very closely with the private market to come up with innovative structures to address various liquidity needs.
And when you hear us talk today about the private market ecosystem, I think it's important just to clarify what we mean by that. These are the general partners (GPs) of the private market funds, the limited partners (LPs) who invest in those funds, and, of course, the underlying portfolio companies themselves. Below that includes, obviously, the founders, boards, and management teams. So I've been very fortunate to work very closely and develop these relationships across this private market ecosystem over this time period, primarily within the late-stage venture and growth equity-oriented segment of the market. I've also served on a number of big venture-backed company boards and advisory boards and advisory committees of private market funds as well.
So that's my brief background. I think we should spend a few minutes, perhaps, talking about some of the growth and evolution we've seen in the private markets, particularly in the secondary markets, over the last 20 years in particular. When we think about the development of the market, when I joined the secondary market back in 2005—this is context—there was roughly $6 to 7 billion of reported annual transaction volume. If you look at last year, Kevin, I think the most reliable sources we saw reported somewhere in the area of $70 billion of transaction volume.
Based on estimates that we're reading from those same reliable sources for 2019, we may hit or exceed, potentially, $100 billion. So there's been quite a bit of growth, clearly, in the secondary market. We'll get into why we think that is later in this webinar. At the same time, there's also been quite a bit of evolution in the types of secondary transactions that have been structured. If we go back to the 1990s, some of the first secondary transactions we saw in the private markets involved limited partners in private market funds looking for liquidity for their liquid interest. Those were some of the first transactions we saw. That's what we refer to as the traditional secondary market. If you look at the last 15 to 20 years, we've seen quite a bit of evolution and innovation in the types of strategies that secondary investors are providing to address various liquidity needs, again, across this ecosystem.
So it's not just at the limited partner level. It's also trying to provide different types of structures that address liquidity needs inside the fund structures themselves as well as the capital structures of the companies. And that's obviously an area that SharesPost spends most of its time on, as well as the SP 100 Fund, is trying to solve needs within the capital structures of these companies. We call all of these transactions that are not simply the buying and selling of an LP interest as non-traditional transactions. We'll get into a little bit of this in greater detail throughout the webinar. Clearly, this is one of the areas that the SharesPost 100 Fund focuses on in the single-asset part of this non-traditional market. And so perhaps, Kevin, before we go on, we'll use this as an opportunity to get a little bit of a background for those who want to be refreshed on the fund itself.
Yeah. This was supposed to be a really simple story when we started the fund. What we were trying to do was provide a diversified portfolio of late-stage venture. The other thing we were trying to do is provide liquidity in an asset class that has very little liquidity. And I think, finally, we were trying to open up to as many investors as possible. Not just accredited investors but to all investors. So what we ended up doing was we looked within the advisory '40 Act. We found the interval structure, typically used for other illiquid underlying assets. But what we found was when we applied it to private equity, it really addressed the needs that we were looking for. So, at a high level, since a lot of people are in the fund, it seeks capital appreciation by investing in late-stage venture-backed private companies. It has access to deal flow through brokers as well as directly from the companies and financial advisors. It offers independent oversight, governance, and transparency as the 1940 Act does. And, finally, it provides daily pricing, daily subscriptions, and the quarterly liquidity. So these were the types of things we were looking for to address the need that our clients were looking for, especially for those clients that had no access to this space.
That's really helpful. And I would say that a couple of the major things I thought were quite interesting about SharesPost was, one, the uniqueness of this SP 100 Fund that has been created and the way it addresses a lot of the needs and provides access to all investors, not just to accredited investors. But also there's a focus within SharesPost to try to look for ways to leverage technology to improve the underlying transaction processes that we facilitate in the secondary market. Technology, obviously, has its limitations, but having been in this market for close to 15 years, I do believe there's a way to leverage technology to try to improve the experience for buyers and sellers on different sides of these transactions. And, clearly, the evolution of this fund itself is a very unique accomplishment.
That's right. We wanted to continue to make this—this is a long-term investment—but we wanted to make it useful for financial advisors and registered investment advisors. It's still a long-term investment, but with this type of structure, it allows them to rebalance their portfolios—if you lose a client, you have that liquidity feature—and so this has really worked out well for our shareholders.
Great. So why don't we move on and talk a little bit about some of the dynamics that we're seeing, and I think one of the major things we've seen over the last 15, 20 years has been a pretty dramatic shift between the public and private markets. If you look back to 1999, the average age of the venture-backed companies that were achieving IPOs was in the four-year range. And part of that, I think, was driven by the fact that maybe the regulatory environment was a little more favorable for companies to access the public markets. There also was not as much private capital, frankly, available for these companies to continue servicing their burn rates.
If you look at 2018, we saw the average age of a venture-backed company taking close to 13 years to achieve IPOs. So that's close to, or over, a 300% change in the time it's taken these companies to achieve those liquidity events. But also, during that period, these companies have also increased quite dramatically in valuations. So that's a really important dynamic, where we've been seeing a lot of the value appreciation in these companies happen in the private market before they're actually able to achieve public market status. And a lot of that has driven a lot of investors globally to increase asset allocations towards alternative asset classes to be able to access some of these private assets earlier, to try to benefit from that value run-up before they actually achieve that public status.
Now, that also provides some challenges. So while these companies are staying private for longer, it also has a tendency to create some friction within the private market ecosystem. And, again, by that, we mean the general partners who manage the funds, the limited partners who invest in those funds, and the underlying companies themselves and their employees and management teams. Because, by staying private for longer, there are various issues people run into. So, for example, if you're the general partner of a fund and you have a portfolio that's taken longer to harvest, if you're managing venture-oriented assets, typically, most of them are still burning capital. You may run out of capital or have not properly reserved to allow these companies to achieve their ultimate liquidity events, whether it be M&A or IPO.
So the secondary market has been working closely with general partners of those funds to try to address various liquidity needs. The limited partners we talked to already, but I think as there's been a growing proration and protraction of these exit events, the life cycle of these funds themselves are exceeding their intended targets. So that's also creating friction at the LP level in looking for ways to get out of these funds sooner. And then, clearly, at the company level, as Kevin will talk to, that's an area we focus on a lot, and there's a lot of friction at that level as well.
Yeah. I'd say that's the other side of the coin. On the company level, you have companies now that are staying private for 13 years. So you have individuals that have been there for a long time accumulating wealth and in need of some liquidity. So we're having HR issues within these companies, and they really come to us, at SharesPost, as a company, looking for solutions to those problems. So for us, at the fund, of course, it gives us a lot of opportunity to get into really great companies.
That's a great point. So someone's challenge is another one's opportunity. I think as secondary investors, what we're excited about is while we're providing these transaction structures to address the liquidity needs of this ecosystem, it allows us to create very interesting investment products to offer to our clients, and often we're able to build very well-diversified portfolios for our clients of private market assets, and due to various inefficiencies of the private markets themselves and some of the asymmetrical information we see there, we often have the ability to buy into these assets at very attractive prices, in some situations, discounts to their asset value or their intrinsic value. So, again, these challenges could provide us with the opportunities to structure what we believe are very attractive portfolios for our clients like the SP 100 fund.
Yeah. I'd say one last point, though, that what truly speaks to the financial advisors and the registered investment advisors, that the companies that used to be trading in the public market that no longer are trading in the private market (the small-cap growth companies, the mid-cap growth companies, the companies that used to be in the Russell 3000 that are no longer available and sometimes never even make it to the public market because they're taken out in an M&A transaction), you have to tap into those companies in the private marketplace. So how do you do that? You go into a VC fund, you go into a private equity fund, those are really hard types of structures to get into. So the SharesPost 100 Fund was a solution that we came up with that really helps financial advisors and registered investment advisors.
Absolutely, and the benefit, before we move on, as well, is we have the ability to buy into these assets often quite late in the evolution of their business models. So when we're coming in, we typically expect these companies to achieve natural liquidity through either an M&A or an IPO event within, on average, two to four years from our date of investment. So by buying into these assets at attractive prices and often having a fairly short duration of our holding periods, we can often almost entirely eliminate the private equity J-curve, which is a very important attribute for our underlying investors and advisors.
From a supply-side, again, I think it's also interesting to point out—and this has been driving a lot of the flow into the secondary market – but just to put things into context with numbers: over the last 10 years, there has been approximately $6 trillion of capital allocated through the private market—and that's not just venture-backed companies; this includes buyout companies, this includes real estate strategies, infrastructure, private debt, things of that sort. But a substantial percentage of that is dedicated to an ecosystem that we serve here at SharesPost, and that growth is what's allowing a lot of these private companies to stay private for longer. Now, we also often say that those primary commitments are secondaries waiting to happen. Although, historically, the percentage of turnover has been approximately 2%. As we're seeing the secondary market become more of a permanent fixture, I think we can say, within this private market ecosystem itself, I think our expectations are that that percentage of turnover will continue to increase over the coming years, thereby making the secondary market itself larger over that period of time. So with that said, Kevin, I'm going to turn it back over to you to provide some exciting highlights about the underlying portfolio.
Yeah. It's been a fairly quiet year in terms of NAV, but in reality, we've been extremely busy here at the SharesPost 100 Fund. We've had a lot of milestones that we hit this year, so I'm going to go through some of these with you. We don't have a lot of time so I want to make sure I hit a couple of points, and anything else that I don't hit I will certainly follow up with everybody after the call. But just a couple of the high-levels. We currently have 54 names in the portfolio, a total cost of $124 million, a total fair market value of $149 million. We have almost $200 million in AUM in the fund. Since inception, we've invested in 84 different names. I think when we first started this fund, that was sort of the challenge: Can we get into really good names? Can we deploy this capital? And I think we've proven that we can, and that's over 300 different transactions.
I think in terms of inflows, we've taken in $68 million this year—that's a record year for us. We've far surpassed last year's inflows, but I think even more importantly, we've deployed $60 million in capital—that's more than we have deployed in the past three years—and that speaks to the fact that we actually have a fairly young portfolio. The idea that we're investing in companies and we're waiting for an exit in two to three years, well, we're going to have some good companies we think that are going to be driving returns in the next six to 12 months that we invested in two years ago. But this year we really set a deep bench that will help drive returns in the next one, three, and five years.
Yeah. Those companies continue to grow themselves just organically. The expectation, obviously, is they'll grow into much larger businesses.
Exactly. Now, we had a quiet year this year in terms of exits. We've had three exits. I think we have a slide on the three exits that we've had so far this year. One exit is Uber. It was a small position for us. It came out early this year. There's a lot of talk around Uber: this is a $70 billion private company, it's one of the largest unicorns that have ever hit the market. We're up about 7.8% in this company right now, but a very small position—not a whole lot of effect on our NAV. Pinterest was another company that went public this year. It's a good example of a company that position sizes mean a lot. When we're talking about the returns of this portfolio, it's not the companies that haven't worked out. It's really companies that have worked out where we really needed to get some kind of position sizing so we can take advantage of the good exits, and I think that's what we have today. That really comes with more AUM, which we do have today, and being able to use that AUM to get high-quality companies.
So Pinterest: we're sitting up about 30% in that company. And then, finally, of course, Lyft. Lyft is a company—a lot of controversy about Lyft and the success, or not success, of the IPO this year. We're up over 119%. So we've still achieved the 2X, and the idea behind all of our companies is that we want to get in these companies two to three years before there is an exit. We don't want to underwrite an IPO, we want to participate in a liquidity event, and that's a good example of what happened with Lyft. While it wasn't a good IPO at all, we're still sitting on a 2X, and that's the position where we want to be in. Obviously, we want to see a really good exit, so it's sort of icing on the cake, if you will, but in a case where it doesn't work out as we had hoped, we're still sitting in a good position.
So what I'm going to do right now quickly is take you through the companies we've added so far this year. There's actually a lot of companies we've added this year: we've added 12 new companies, which is a record for us as well. But I'm going to go through fairly quickly because we only have a certain amount of time, and any companies that you have a particular interest in, please feel free to follow up with us. We've added Mesosphere this year; Mesosphere helps organizations adopt and integrate cloud technologies. We've added Lime this year. It's a company that I think a lot of people know—it's a scooter company. We think it's the best scooter company in the space and that's why we're investing in it. Tanium is an endpoint management and security platform. I think a company like SpaceX people really know a lot about. We've made it one of our largest positions. SpaceX has two business lines: one is the new Starlink business, which is the world internet, the other part of their business is their space exploration business, which is a much longer-term part of their business.
KeepTruckin: this is a leader in modern fleet management solutions. We really like this company. It's backed by some of the best VCs. It's a company you may not have heard of before, but if you're in the Silicon Valley ecosystem, it's one of the most popular companies in the Valley. Heap is a company that you probably also haven't heard of. It's backed also by some really great VCs, and it's one of those companies that I think you will hear of in two to three years. We were able to participate in the primary round of Heap. Carbon is a world leading digital end-to-end manufacturing platform. It's a 3D [printing] type of company, and we're really excited to be part of that company. It's also a company that's very difficult to get into, and we've been able to get into that.
Fundbox is a company that offers flexible business credit at the point of need. So it's a small business lending company. Also similar to Heap, not a company you’ve probably heard of, but I think you definitely will be hearing of this company in the next two to three years. Robinhood, a company I think everybody's probably heard of at this point. It's a trading platform—they call it a millennial trading platform because a lot of young people use this company. Udemy is a leading global marketplace for learning and instruction—very popular company as well. HIMS is an online platform for the sale of wellness products for men and women, and also great backing, great product. We're pretty excited to have all these companies. So, as you can see, we’ve been really busy adding new companies to the platform and to the fund. It's been a lot of work.
Yeah, I know it's been a great job by the team. I think I would also say that, in addition to some of these names that are more household-oriented—people know these names, like SpaceX and 23andMe and those of the world—I think we're spending a lot of time as well looking at what we would call pre-unicorn companies. So companies that have not yet achieved that billion-dollar valuation or are very close to doing so and have the same types of revenue traction, growth metrics, high customer diversification, strong investors, syndicates, and serial entrepreneurs and management teams that know how to get these companies liquid. We're looking for these companies as well, from a portfolio construction standpoint, to build a very well-diversified portfolio. In many situations, we have the ability to get into those companies at attractive prices, sometimes better than prices we can get into once they achieve that unicorn status because they become a little bit more mainstream.
That's right, and, of course, if they're not as well-known, we're getting in typically at better prices, and that's to speak to companies like Heap and Fundbox and some other companies. We've also been busy adding to the positions within the portfolio as well. We've also added to 23andMe, which you just mentioned. Blend Labs, Dataminr, Marqeta, Nextdoor, One Medical Group, we've added to. SoFi's a position we've also added to, and Wag!.
Yeah, and I think it's also important to point out that the quality of the securities we're buying in these companies is equally as important, in some situations, as the companies themselves. A big part of our work, frankly, is working through the capitalizations and the waterfalls of these companies. In many situations, you may find common securities and/or preferred securities, but unless you actually really understand the capital structure of these businesses—the rights and privileges that certain share classes have—it's very difficult to buy them in a sophisticated way.
That's right. I can point to Uber, for example. We looked at Uber at a $7 billion valuation, and we saw common shares. We looked at the capital stack, and that didn't make a lot of sense for us. I think that's proving itself out now in the public market. We bought it at a lower valuation and we bought preferred shares. It's very important, as Christian pointed out, to look at the capital stack and the structure of those securities.
Maybe moving over to looking at your thoughts on the macro environment and how that affects venture and private equity.
Absolutely. Happy to do that. Why don't we start with talking about some of the trends and secular opportunities. I think one of the important things to point out, as you're hearing, is we're building well-diversified portfolios, so the portfolios that are not just exposed to any specific vertical. As you can see here on the pie chart, we have quite a variety of different underlying asset classes within the sectors we're buying into. A lot of these are tech-enabled, but that's most businesses today: most businesses today are working on technology-enabled platforms.
I would say some of the more interesting areas that we're spending time on are data analytics, cloud infrastructure (migrations to cloud, cloud software-type platforms), cybersecurity, artificial intelligence—these are areas where we're seeing companies generate significant growth, long-term-type recurring contracts, we're seeing exit multiples in both the M&A as well as IPO market [as] very attractive. These are companies that we're being very thoughtful about adding to the portfolio. Of course, it needs to make sense: we need to get access and we need to make sure we're buying the right securities at the right prices. A lot of these types of companies we've just described seem to be gaining on a lot of interest and a lot of capital in the market, so I would say those are some of the areas that we're really spending time on.
In terms of the macro environment volatility, look, most of us have lived through different cycles within the markets. I think one of the things we should have learned from the past is during periods of increased volatility, there tends to be a tendency for fear to enter into the market. When fear enters into the market, it's quite often that investors will sell their investments that they're least comfortable with and have the least amount of liquidity, so, often, that involves private-oriented illiquid assets. We look back 10 years ago to the global financial crisis. We saw some very high-caliber assets being sold off for a variety of reasons, driven a lot by macro volatility and uncertainty about the global future and trends that are playing out. I think if you look at the performance of some of the vintages of the private managers that actually bought assets either by increasing their positions at lower cost bases or buying in for the first time at lower cost bases, those are some of the higher-performing vintages that we've seen over the last 20 years.
I think the key is, while we are always very cautious and concerned about how current market volatility can impact our existing portfolio, this does provide the opportunity for us to increase our position sizes and sometimes lower our average cost basis in some of our existing investments that we have high conviction in. In parallel, some investments historically that may have been overpriced, as a result of our diligence findings, may now come up with opportunities at more attractive prices that we are comfortable to buy into. It's very hard to predict the future in terms of the global and political environment. We are living through a highly volatile environment. I think we are already seeing a kind of decrease in the price sensitivity sellers are having. Maybe you can give some experiences even just with the SP 100 Fund.
Yeah, so I think a lot of shareholders that have been with us for a long time have seen how we've actually held up in periods of financial distress—we've held up extremely well. Back in, for example, January 2016, that's when we picked up some of our best companies. Companies like Lyft, DocuSign, Tenable Network, ThreatMetrix, Zuora. So while we don't like to see the market sell off for our shareholders, for their public portfolios, we actually typically benefit a lot in those types of environments.
Right, absolutely. In terms of the outlook, I think we're continuing to see an increase in the supply through various origination channels that we have access to here throughout the private market ecosystem. We're very bullish on the environment and we're very excited that, even in this period of volatility, we're still seeing some substantial exits happening, both in the M&A market as well as the IPO market. These are companies that are going to raise at least a billion dollars through the IPO alone. These are multibillion-dollar venture-backed businesses.
From an outlook standpoint, I think we expect the secondary market to continue to grow as the private market itself continues to grow, and we're very excited to continue working with the private market ecosystem to provide a variety of different structures and strategies to address a variety of the commensurate liquidity needs, whether it be at the underlying portfolio company level, as we do today at SharesPost and inside the SharesPost 100 Fund, as well as in these other areas of the private market ecosystem in the future.
So I think that wraps up the portion that we wanted to present to you today. We're going to now turn over to some questions.
Yeah. Let's see what we have. A bunch of questions that have been coming in throughout the webinar. We have one question here that says, "With venture-capital-backed enterprises, don't I need to get in on the ground floor or an early stage to make money?"
Sure. Yeah. I can take that one, Kevin. I think it's a very good question. I think, historically, the answer would probably have been yes, but as we've seen this dramatic shift that we talked about earlier between the public and private markets, we're seeing these private companies stay private for a much longer period of time. Again, the average company that's achieving an IPO event is, on average, 13 years old. So it allows investors like us on the secondary side to come into these companies very late, frankly, in the game. So I think that the opportunities clearly can be significantly more attractive if you do come in early. The risks, quite frankly, are also higher earlier in the development of these companies. So we like to come into these companies when they're far beyond their technology risk. It's more into the growth and execution risk stage.
Let’s see the next question here: “What kind of financial information is available for review prior to an investment in a series offering of a venture capital-backed enterprise?” You can take that.
Yeah. So, basically, when we look at a potential transaction, we get a varying degree of information. If it's in the secondary market, typically, we'll have anywhere between a small amount of information to full information. Depending on how much information we have, it really depends on what kind of position we're going to put on. If it's a company that we really like and we've analyzed the cap table and we understand what that looks like and we don't have full information, we're only going to take on a smaller position. Once we take on a smaller position, we'll then use that to build a relationship with the company, to get more information, and only then will we be building up the position from there. Beyond that, sometimes we will get full information, and of course, we'll put on a bigger position. Or if we're participating in a primary round and we get full information, that also will allow us to put on a larger position.
Exactly. So I think it comes down to portfolio construction and sizing of the assets depending on the information and level of comfort we have.
That's right. Let's see what else we have here. Well, here's a question more about the fund. These are some basic questions about the fund from people who may not be invested right now. “What is the fund's minimum investment?” Just remember, this as a '40 Act fund, acts just like a mutual fund in the '40 Act. The minimum investment for this particular fund is $2,500 [for Class A Shares]. Obviously, that comes as a surprise for a lot of people that are investing in venture and private equity, and that's what we're trying to do with the 100 Fund, is make it available to everybody, and so this fund, the minimum is $2,500.
Here's the next question: “How has venture performed historically during a market downturn? If the IPO markets slows down, what are the implications for company exits and the fund?”
Sure. Great question—and we're living through an environment where that may very well be the result, I think. If you look at the current environment, we've had quite a bit of volatility dating back to the second half of 2018. We've continued to see the IPO markets, frankly, stay open, although, historically, we have seen, in periods of market volatility and downturns, is that that window either narrows or closes. I think the important thing to keep in mind is these businesses have the right backers; they have access to capital. Even though they're still burning, if they are sustainable businesses, they continue to have opportunities to exit through the M&A market opportunity or they can hold off and wait, if they do want to go public, until a later point in time so long as they have that backing. But approximately 80% of the venture-backed assets achieve liquidity through mergers and acquisitions, not through IPOs.
Now, some of these companies that we're talking about today are arguably large companies that make it harder to achieve M&A, and so some of them will probably wait or be forced to wait for an IPO window. So, clearly, we're going to continue to see—as market volatility increases, perhaps there's a downturn—that window will narrow, and so you will have companies that may wait on going public. We're seeing some of this in the press with WeWork, actually, in the market saying that if the market environment is not right, they may hold off on their IPO. One of the main backers, SoftBank, is kind of pressuring that. They're not the only investor in that cap stack. But it is a very good question. I think, again, a bigger part of our diligence is not just IPO outcomes, we want to make sure that they're strategic value propositions as well, and M&A outcomes (and, again, that's 80% of the exit outcomes in this ecosystem).
That's right. So I know we're kind of running out of time here. We've run out of time, but maybe one quick last question we have here, and this really, I think, goes to a lot of financial advisors who are looking to invest in the fund. “What custodial platforms is the fund available on?” We have 54 plus selling agreements in place, but in terms of clearing platforms, we're on all the major clearing platforms: Schwab, TD, Pershing, Fidelity, Wells Fargo Clearing, and a lot of the smaller platforms as well, like COR Clearing. So we're pretty much available everywhere you can possibly be in terms of clearing. And it took quite some time to put that distribution in place.
So I think that's all the time we have right now. We do have a lot of other questions that have come in, and as I said at the beginning of the webinar, we want to get back to everybody. So we will follow up with you directly. We're really happy that Christian is able to join us, and we're very excited to have you on board. Thank you everybody for joining us today. Have a great day.
Thank you everyone. I look forward to speaking soon.