This week Cathie Wood’s ARK Invest launched its first foray into private markets with the ARK Venture fund. The strategy is structured as an interval fund and will offer a concentrated portfolio, largely made up of private companies, to retail investors. The launch comes at a time when Wood’s flagship ETF, ARKK, is down badly, and her style of investing remains wildly out of favor. As with everything Wood does, there is no shortage of criticism of the new fund, its fees and whether it’s right for retail. But the Alexes want to look on the bright side.
Alex Rosenberg: There are a lot of positive things to be said about this fund.
Alex Steger: Absolutely.
Rosenberg: Such as…?
Steger: Oh, I see how this is working. OK, well, it is true to say that the minimum investment of $500 is very low for a fund that will invest in private companies. Also, the interval fund structure could be argued to make sense for Wood as it means she won’t be subject to more whimsical flows meaning she can hold her positions till they hit her often lofty valuations without having to meet redemptions along the way. And investors do get some level of liquidity, albeit quite limited.
Rosenberg: Also, there is an argument that retail investors are insufficiently exposed to innovative companies because the enhanced ability to access capital in private markets means that by the time companies go public, their years of turbocharged growth are already behind them (and the biggest gains went to earlier-stage investors). If you agreed that was an issue, then you might think it’s good if retail investors can get exposure to companies while they’re private.
Steger: That is a positive thing to say, especially for you.
Rosenberg: Thanks. Although… on the other hand… if you do think that’s a problem, then the problem would seem to be exacerbated by the launches of funds like these, which shovel even more money into private markets. And in general, you might think (as I very strongly do) that investors are better served when more companies are public, since investors get much more information and it’s easier for retail investors to get cheap exposure through products like index funds.
Steger: There is also the question of whether she, as an investor, is better served by buying public companies. That is what she has made her name doing, and she enjoyed a spell of stellar success (as well as the current less stellar spell). She specializes in picking tech stocks especially those involving biotech and blockchain, and there is no shortage of such firms in the VC space, but it is a departure for her, and one that has tripped up mutual fund managers before.
Rosenberg: That’s a nice thing to say too, actually.
Steger: It is? Look, it might be perfect for her, and private companies with their made-up valuations as opposed to daily prices might be ideal terrain but my point was that this is a drift in style and that can be a red flag.
Rosenberg: Right, but you said you’re worried she could join those ranks of fund managers who have been tripped up. And look at the performance of her flagship ARKK ETF this year – it’s down 61%. So if you invested $1,000 at the start of 2022 you now have $390. It’s staggering. And I know the market’s down, but there are only three stocks in the S&P 500 that are down more than 60% this year. I think the flag might have a few crimson splotches already.
Steger: Well, if it’s red flags you are interested in, we should also talk about the fees on the new fund. As Citywire reported in August, the ARK Venture fund’s expense ratio of 4.22% is at the upper end of interval funds tracked by Morningstar, and the management fee of 2.29% is the top of any such strategy using this structure. Wood told us this week that this was still cheap compared to an actual VC fund and said the fees could come down (‘You can always cut fees, but you can never raise them’), but they are undeniably high.
Rosenberg: And that’s just the headline. The other issue is that for the companies which are private (70% of the fund, is the plan) there obviously isn’t daily market pricing. So the net asset value that ARK captures 2.29% of is based on the company’s own fair value calculations – which, as the fund’s SEC filing states, ‘may be materially different than the value that could be realized upon the sale of the security.’
Steger: Well the good thing is Wood has no track record of holding wildly different valuations to the wider market. Oh, wait…
Rosenberg: Right, exactly. She’s famous for her outlandish predictions for stocks like Tesla, for bitcoin, and for the returns of her own fund – saying in April she expects ARKK to deliver a completely ludicrous 50% annual rate of return. And this is the shop you’re trusting to be the one analyzing the value of private companies, where the higher they mark them the better their performance and the higher their fees?
I mean, this is the reason that private markets have historically been limited to institutions and accredited investors! The due diligence that must be performed if you want a basic understanding of what you’re buying – whether that be an individual company or a fund – is significant. And it’s much easier to get ripped off than it is in public companies, where things are marked to market every day and the information about the companies is readily available. So to see Wood go on CNBC and try to find $500 investments for this kind of structure is pretty concerning, and her claim that she’s ‘Democratizing Access to Venture Capital Funds’ is downright galling – not least because this doesn’t remotely resemble how top endowments invest in venture capital. And just as not every non-public company is alike, nor is every VC fund.
Steger: Still, at least it’s not 2 and 20 like those institutional schmucks pay!
Rosenberg: Yes, but the total expense is more than double 2%, and the fact that ARK isn’t participating in the fund via a performance fee has been mentioned by others as a red flag, since it ‘raises potential questions over alignment’ (tempting ARK to bring in so much money that it is unable to meaningfully invest in small but promising companies, etc.).
Steger: The money point is an interesting one. For a manager who has seen assets surge like almost no one, and who – as mentioned above – is never shy of a big target, Wood was surprisingly moderate in her outlook for the fund’s size. She told Citywire that Andreessen Horowitz, a backer of the Titan platform on which ARK Venture has launched, hopes to raise $500m for the fund, which she suggested was ambitious. Whether this is a reflection of a humbling time in the markets or an acknowledgement of the fund’s less accessible structure, we don’t know.
Rosenberg: Well, it’s much more accessible than it is exitable.
Steger: Right. An interval fund, for the uninitiated, is a closed-end offering that is non-listed and does not trade on the secondary market. As such, they cannot be bought and sold daily. Instead, they allow shareholders to sell a portion of their shares back to the fund on a periodic basis at a price based on net asset value. The repurchases of these shares take place at certain ‘intervals,’ which are usually every three, six or 12 months and the repurchases can range from 5% to a maximum of 25% of total assets. ARK Venture’s intervals will be quarterly, but it will only offer to buy back up to 5% from investors. As Wood put it, ‘If your entire position in the fund is less than 5%, you’ll get out… And if everybody wants out at the same time, everyone will get 5% of the way there.’ Which is, err, fine?
Rosenberg: A cynic – which I’m definitely not – might say that she’s taking her sizable fan base and ushering them into the retail investing structure that pays her the highest possible fees for the longest possible period of time.
Steger: I thought we were saying nice things.
Rosenberg: ARK Venture Fund is a very pleasant name.
Steger: There we go. That will keep the lawyers happy.