Christian Munafo Talks Private Market Landscape on Money Life with Chuck Jaffe

Chuck Jaffe

Christian Munafo, Chief Investment Officer for SP Investments Management, the firm behind the SharesPost 100 Fund is here. And we're hunting unicorns today on the NAVigator. Welcome to the NAVigator, where we talk about all-weather active investing and plotting a course to financial success with the help of closed-end funds. The NAVigator is brought to you by the Active Investment Company Alliance, which is a unique industry organization that represents all facets of the closed-end fund industry from users and investors to fund sponsors and creators. And let me tell you, there are not many creators doing anything like what we're going to be talking about today because my guest is Christian Munafo and he is with SP Investments Management. They are the folks behind SharesPost [100 Fund]. So SharesPost.com, on Twitter @SharesPost, and they run the SharesPost 100 Fund. Now, I don't want to lose you in jargon. So I want you to keep in mind the term unicorn, which I'll get back to in a second. But the SharesPost 100 Fund is an actively managed, continuously offered closed-end interval fund. It trades under ticker symbol, PRIVX and yes, it's unusual that a closed-end fund has a five-letter ticker symbol. But what they are looking for is late-stage venture-backed companies. The kind of thing that high-net-worth investors and institutional investors have been buying for years that individual investors couldn't get into. In common terms, they're looking for the unicorn—the “Facebook” before it becomes “Facebook” on the exchanges. Again, if you want to learn more: SharesPost.com. If you want to learn more about closed-end fund investing in general, go to aicalliance.org, the website for the Active Investment Company Alliance. Christian Munafo, great to have you on.

Unicorns are private companies with an enterprise valuation of $1 billion or more.

Christian Munafo

Hi Chuck. It's great to be here. Thanks for the opportunity.

Chuck

So I think I described it right. I don't want to put you in mythical terms. But the basic idea here is you're hunting unicorns with this.

Christian

Yes, that's certainly part of what we do. You did a very articulate job describing the Fund. It is a very unique product in the market. ¹ And there's been an interesting trend that's been going on, Chuck, for the last 15 years that—what many people don't realize—and that is that the number of publicly traded companies has essentially been cut in half, from somewhere in the 8,000 range to approximately 4,000. So while that's been happening, the number of private companies has surged. What's interesting is these private companies, particularly these private, venture-backed companies are staying private for longer due to a combination of factors, which ranges from regulatory changes that make companies less excited about being public, to general concerns about experiencing unnecessary volatility. As some of these companies, while they're still maturing and high growth, they're still evolving their business models. And sometimes, as we know, the public markets tend not to be that tolerant of those types of changes. And perhaps the most important fact, Chuck, is that the amount of capital that has been made available to the private market landscape, to these types of private companies, has absolutely soared over this time period, which means that companies essentially don't need to tap into the public markets to raise capital. And just a quick example, back in 1999, the average venture-backed company was going public within roughly four years from inception, and that compares to approximately 13 years today. Now, while these companies are staying private for longer—this gets to your point on the unicorn—they're also growing quite significantly in value. ² So the value of the companies at the point that they go public or, in many cases, also get acquired, has surged over this time period and has created this unicorn phenomenon where you have a lot of these companies that have reached $1 billion-plus valuation status. So that is absolutely part of the universe of companies that we are looking for. We are also looking for companies that are on track to achieve that $1 billion-plus status. They may not yet be there, but they have kind of the same characteristics and pattern recognition that we think they can achieve that. But yes. Part of what we do is looking for these late-stage, highly valued companies.

¹ The SharesPost 100 Fund uses a proprietary due diligence process that is unique to the investment team to identify and invest in late-stage private growth companies. This closed-end interval fund is one of the only ways for unaccredited investors to access private companies.

² The market cap of IPOs increased 294% between 1999 and 2018. Past performance does not guarantee future results. Source: Tech Stock Initial Public Offerings: Updated Statistics, Jay R. Ritter, Cordell Professor of Finance. University of Florida. (Reflects larger private/IPO market, not fund holdings.)

Chuck

You've got an interval fund here, which is not necessarily the standard closed-end fund. An interval fund tends to normally be a little trickier with liquidity. You're dealing with late-stage private companies. There's not an exchange where this stuff is valued. It's kind of valued out in the ether. When we see it in traditional mutual funds or what have you on those rare occasions when they get it, you're never quite sure how your fund is valued. So this fund, how is it valued? Because with a five-letter ticker symbol, my audience has been hearing about closed-end funds and thinking discount. Look at the discount. There's no discount here. This trade's like your traditional mutual fund even though it's not even your traditional closed-end fund.

Christian

Yeah. It's a great point. And it's a question that we commonly are presented with. But it's not just companies that have become household names, because sometimes the price that you need to pay to acquire securities, whether they be preferred securities or common securities—I don't want to get too deep into the weeds here—but sometimes the price that you need to pay to get entry, if you will, to some of these more popular names doesn't warrant us pursuing them, because at the end of the day, our mission is to also provide attractive risk-adjusted returns for our clients. And so our mission is to not only identify these very exciting companies, but it's also to find ways to structure attractive entry points that allows us to generate strong returns for our clients. So you'll see, in our portfolio, names that you might be familiar with, including SpaceX and 23andMe and Palantir and Fundbox, but there's also a lot of other names that you may not have heard of. We think these companies have the same types of characteristics, but we've been able to get into them, in some situations, at better valuations because they're not as popular. But on the valuation front, when we created this product a number of years ago, we worked very closely with the SEC, with our auditors, and with private valuation experts to come up with a very comprehensive valuation analysis and, Chuck, the most important valuation input when you're looking at private companies is almost always the last round of financing. So that's usually the most effective indicator of what the value of the business is.

Now, if the last time the company raised money was three, four years ago, the validity of that statistic, obviously, may not be as relevant. And so that's usually the main driver. But there's other drivers that will factor into our valuation, which include: What are the operating metrics of the business? Are they hitting the plan that we've been provided? How do those operating metrics compare to companies that we've identified in the public and private markets that are comparables? So, how do they trade? If there are exits that have happened in companies that are similar to this specific company we're looking at, what types of valuations have those companies exited at? So we'll look at revenue multiples, if a company happens to be generating positive cash flow, we'll look at EBITDA multiples, we'll also look to see if there's been significant changes within the senior management team. We'll look at, also, what other folks that may report their values, such as the public groups you mentioned, what they mark their books at, just to see if we can have any correlation. But it's a fairly comprehensive valuation process that we employ here. And again, it's one that's been thoroughly examined and approved.

Chuck

It is continually priced. It doesn't trade at a discount. It has all these sorts of things in it. How should an investor be considering it? Because this is a way to get into an asset class that, truthfully, unless you're a high-net-worth individual, you really have never had any exposure to. But how much of a portfolio do you want to let that be? Because you are talking about an area of the market that, while it sounds great when we're talking about unicorns, you have to understand that you don't find unicorns that often, even in today's markets. And sometimes, when you hunt for unicorns, you come away wondering if they're a myth. That being the case, how do we mitigate risk by making sure that it's not too much of anybody's portfolio?

Christian

Great question. And I would start by saying unless you believe that you've identified an asset manager that has a track record of investing in this asset class, has the sophistication, the institutional processes that allow you to effectively do due diligence on these types of companies, you probably shouldn't be pursuing it. But assuming you have that, such as we have here at SharesPost, we look at a variety of factors here and it's hard for us to establish a specific percentage that the average person should allocate. We see institutional-grade investors, some putting 30-40 percent of their books in alternative investments, of which this would fall into one of them. But I think when we talk to investment advisors representing all types of clients, we're often seeing some type of a single-digit percentage of someone's overall portfolio construction that would be allocated to this type of an investment class. Again, it really depends. And we're not going to advocate on what that should be. But just generally speaking, we often see something in the single-digit percentage of someone's overall portfolio as a portion of their alternative investment allocation.

Chuck

Well, Christian, really interesting stuff. I think we all learned something today. Thanks so much for taking time out to join me on The NAVigator.

Christian

It's a pleasure, Chuck. We appreciate everything you're doing for the market. Look forward to speaking soon.

Chuck

Christian Munafo is Chief Investment Officer for SP Investments Management, which runs the SharesPost 100 Fund. Ticker symbol: PRIVX. And you can learn more about the firm and the Fund at SharesPost.com. On Twitter: @SharesPost. To learn more about closed-end funds and business development companies, go to aicalliance.org, the website for the active investment company alliance. They're on Facebook and LinkedIn at AIC Alliance and they sponsor the NAVigator. This was a great way to start the January 31st edition of Money Life. Up next, it's the first of two big interviews with Reed Murphy from Calamos Wealth Management. Stick around.