Featuring Kevin Moss
Liberty Street Advisors, Inc.
The Private Shares Fund, advised by Liberty Street Advisors, invests in late-stage innovation-driven private equity companies that have the potential to not only disrupt the market but may also improve the productivity in our daily lives. The Fund is a closed-end interval fund that offers individuals, family offices, and institutions an efficient way to invest in private businesses.
Kevin Moss, Managing Director of Liberty Street Advisors, and portfolio manager of The Private Shares Fund, recently answered questions about what closed-end interval funds are, which investors may be interested in allocating a portion of their portfolios to the category, and his management team’s role in creating the closed-end interval asset class.
A closed-end interval fund is a publicly registered SEC 40-Act fund that allows investors to purchase less liquid securities. Investors can buy several interval funds every day like an open-end mutual fund but can only redeem shares quarterly. Typically, the interval structure allows for up to 5% of net assets to be redeemed each quarter.
The SEC first authorized the creation of interval funds in 1992, mainly as a way of allowing closed-end funds to continuously issue shares that could be purchased and redeemed at NAV.
For their first twenty years, growth in the category was slow, but interest began to pick up after the 2008-2009 recession. According to Interval Fund Tracker, total assets under management in the category grew from approximately $10 billion in 2010 to more than $45 billion across 73 strategies as of November 2021.
While at my prior firm, SP Investment Management, we started thinking about creating a new fund in 2011. The process of coming up with a structure and the SEC registration process took more than two years. The SharesPost 100 Fund was launched in March 2014. In December 2021, Liberty Street Advisors, Inc. became the advisor to the Fund, and we subsequently changed the name to the Private Shares Fund. The Fund’s entire investment team became employees of Liberty Street.
At my prior firm, we had been getting many requests from financial advisors about how non-accredited investors could access private equity investing. We also noticed that companies were staying private longer because much of the returns that used to be achieved in public equity markets were now being achieved while these companies were still private, and investors may have been missing out on significant growth opportunities.
In addition, advisors told us they wanted to provide a liquidity feature to rebalance client portfolios, and to give clients relief when, for example, buying a house or sending kids to college. By contrast, advisors could put clients into a traditional private equity portfolio, but these often come with eight- or 10-year lockups, higher investment minimums and performance fees.
The interval fund structure not only could democratize access to this asset class beyond accredited investors, but it also provided a liquidity feature, the regulatory protection provided by the Investment Company Act, and lower overall expenses than what one might see in traditional private equity funds.
Closed-end interval funds have quarterly, and in some case, monthly redemption policies. While investors in open-end funds can redeem shares at any time, interval funds typically limit the repurchase of shares to once quarterly. Also, they’re not obligated to fulfill all redemption requests. The limited redemption process gives interval fund portfolio managers greater flexibility to keep assets invested in less-liquid opportunities with longer timeframes that may generate outsized returns.
Also, investors who buy traditional private equity funds must review and sign pounds of paperwork—they may include a Private Placement Memorandum (PPM), subscription agreement, term sheet, investor suitability questionnaire, and more.
CLOSED-END INTERVAL FUNDS VS OPEN-END AND PRIVATE EQUITY FUNDS
Remember that the closed-end fund interval structure allows portfolio managers, advisors, and clients to buy into an alternative asset class—late-stage private equity in the case of The Private Shares Fund.
One reason advisors should consider private equity for their toolkit is the long-term historical performance of the category, which of course cannot be guaranteed, and can have had a wide dispersion of returns.
Investing in closed-end interval funds also requires a willingness to sacrifice immediate access to invested capital in exchange for potential excess returns, which is why they may be more suitable for risk-tolerant investors who are willing to stick with them over the long run.
For The Private Shares Fund, it also gives investors the potential to invest in long-term “unicorns”. While many interval funds pursue opportunities across different industries, some focus on specific sectors. The Private Shares Fund invests primarily in late-stage private growth companies in the high-tech and technology enabled sectors. Many of these unicorns—high potential growth private companies often with established product lines and client basis, varying levels of profitability and valuations of $1 billion or more and have established product lines and client bases. As potential future merger or acquisition or Initial Public Offering (IPO) candidates, these companies may have the more mature fundamentals than many smaller public companies.
If you look at the stability of The Private Shares Fund’s net asset value since its launch in 2014, the standard deviation is about a quarter of the public indices. The primary reason is we're not trading in a public forum, and we're not trading on daily supply and demand.
We really like the private space economy—we're looking at companies that are participating in the space “space”. The space economy may be immensely disruptive. Hence SpaceX, which we have had in our portfolio. SpaceX is Elon Musk's private company with the idea of making space travel affordable to both individuals and companies. The firm is also establishing a network of satellites that would allow for high speed internet access to be available anywhere in the world. This part of their business is called Starlink.
We have also liked Axiom Space, which is the destination or infrastructure play that's building an international space station (ISS). Unlike other firms, Axiom Space has a contract with NASA to attach onto the existing ISS and allow them to build out their new international space stations. If you have reusable rocket ships, you need a space station destination. Right now, there's only one international space station. And few companies are trying to build private a space station.
Ax-1, the first mission of Axiom Space, is currently set to launch to the ISS in March 2022.
An additional area that we have invested in is cybersecurity. Governments, companies, and individuals unfortunately have increasingly needed to protect themselves against people trying to hack into their systems. And every time somebody hacks into a system, you fix it and then they find a hack for the fix.
The Fund’s portfolio is also spread across businesses in the education technology, digital health, and enterprise software sectors, among others.
We are partnering with a Switzerland-based global asset management company to bring this fund’s model to market in Europe and Asia.
For more information on The Private Shares Fund, financial professionals should contact their wholesaler by calling HRC Fund Associates, LLC at firstname.lastname@example.org or 212-240-9726. Individual investors and shareholders should contact their financial advisor, or the Fund at 800-207-7108.
Kevin Moss has over 25 years of senior level experience in financial services, his specific areas of expertise include the management of client relationships, investment research coverage, block and position trading, and operations management.
Prior to Liberty Street Advisors, Kevin was President & COO of SP Investment Management (SPIM) overseeing the operations and trading of the SPIM funds. He is also one of the creators of the PrivateShares Fund, formerly the SharesPost 100 Fund, still serving as the President of the fund, one of the portfolio managers and a member of the investment committee.
Prior to SPIM, Kevin was a senior portfolio manager at First New York Securities, where he managed a global macro book. Kevin began his career as an institutional equity’s sales trader working for Instinet, and later Commerzbank. His client base included hedge funds, pension funds and proprietary trading desks. Subsequently, Kevin held a series of distinguished posts at leading hedge funds and proprietary trading firms including serving as the head of international trading for Libra Advisors and Opus Trading Funds.
Kevin received his undergraduate degree in finance from Tulane University and his MBA from Columbia Business School, magna cum laude.
The Liberty Street Funds offer investors and financial advisors mutual funds sub-advised by independent boutique managers who possess expertise in their asset class. Because Liberty Street focuses on boutique managers, financial advisors can provide value-added strategies in actively managed and less-correlated portfolios to their clients. Through its selective multi-manager family of funds, Liberty Street provides access to timely investment strategies. The Liberty Street Funds are advised by Liberty Street Advisors, Inc. HRC Fund Associates, LLC, Member FINRA/SIPC, is an affiliate of Liberty Street and not affiliated with Foreside Fund Services, LLC.