Destiny (DXYZ) or fate: The rise and fall of a private market fund

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“How can I buy shares of SpaceX….or Stripe or OpenAI?”

Now, you might think the answer is obvious but then again, maybe you’re wrong! The question itself is quite common. Whether asking themselves or someone else, anyone interested in investing or in technology startups will likely have passed over this thought at some point. And if not the companies mentioned above then maybe some other hot startup cum private market juggernaut. 

Whenever we hear of new innovative ways for retail investors to invest in private markets, it always makes us smile. Another part of the long-standing wall that has kept retail investors from investing in alternative assets crumbles and gives the rest of us a look through to the other side.

That's why when we came across The Destiny Tech 100 (ticker symbol - DXYZ) a few months back, we thought - “Wow, this looks pretty cool”. And while that may have been the case, it didn’t take long for this sweet new opportunity to look a little ‘off’.

Let’s take a look at The Destiny Tech 100: what it is, how it works, why the hype, and, of course, why the fall from grace!

Now, it's unsurprising that Destiny’s launch created a lot of media attention. They were bringing pre-IPO shares in amazing companies to the masses. Companies that, not too long ago, would have already gone public in many cases. So investor interest was naturally high.

It was pinned as “the first ETF for shares of pre-IPO startups”. A publicly traded fund made up of 100 exciting private technology companies, allowing everyday investors to buy shares in the companies they hear and see so much about online and in the news. Companies like SpaceX, OpenAI, Stripe, Revolut, Plaid, Bolt, Discord and more.

(For those of you unfamiliar with ETFs, it stands for Exchange Traded Fund - a type of investment fund that’s traded on a stock exchange. ETFs own financial assets such as stocks and track an underlying stock market index).

The problem was, DXYZ  was a closed-ended fund while an ETF is an open-ended fund. And there’s some important differences that will help explain some of the issues that arose.

On the face of it, DXYZ seemed like a great product. Investors could invest in private companies that are backed by the biggest venture capital funds in the world. On top of this, there were no accreditation rules, no minimum thresholds (typical in private markets and secondary transactions), strong liquidity as you could sell on a public market (the New York Stock Exchange), AND you could get immediate diversification across a large number of companies. Sounds pretty great, right?

The problem was that the mechanics of a closed-ended fund meant that it was open to some issues. With ETFs, which remember are open-ended, shares trade at a near-identical price to the NAV (Net Asset Value - the value of the actual assets in the fund). This is because the number of shares in the fund can be adjusted by creating or destroying some of them to keep share prices in line with NAV. This create and destroy process is known as “Arbitrage”.

Closed-ended funds like Destiny work a bit differently. The fund raises money by selling a fixed number of shares in the fund and uses that money to buy shares in the target companies (Stripe, SpaceX, OpenAI etc.) The shares of the fund that they create and sell are the only ones that will be available and because they must transact on the open market, unlike mutual funds, the price of a closed-ended fund's shares can be disconnected from its NAV based on supply and demand.

So, if there’s a lot of excitement around the product and it attracts a big inflow of investors, the price can quickly start trading at a premium. And there is no way for the fund managers to correct this through arbitrage. When it came to The Destiny Tech 100, “trading at a premium” is putting it lightly! At one point shares were trading at over $105 (I also read it hit $117 but couldn’t find the proof.)

Now, that mightn’t mean anything to you so here’s some simple maths thanks to data about the fund that's readily available online:

The NAV of the fund was roughly $52 million, meaning, so far, they had spent $52 million to buy shares in these private companies. The number of shares issued was a little under 11 million. Meaning there were 11 million shares available for investors to purchase. Divide 52 million by 11 million and you get $4.72 per share (This is rough maths but it's only a few cents off the true value.)

So a single share’s value was a little under $5 but at one point they were trading at $105. That’s a 2100% premium, or in other words, about 100 bucks built on FOMO. Insanity!

So how and why did this happen? One notion is that the NAV was severely miscalculated by the fund managers. But that’s highly unlikely. They have incredibly smart and capable people working on this and everything points to them valuing it fairly.

The other theory, which seems fairly reasonable, is that retail investors, who don’t have many options for investing in private markets, were just too optimistic and excited about the opportunity to invest in these companies. And, ultimately, their enthusiasm, FOMO and a supply/demand imbalance drove the price sky high! As a result, a lot of people will have lost money. 

As of this morning, DXYZ is trading at roughly $15, a 200% premium. Whether it's a good buy or not, isn’t for us to say. A lot of the companies in the fund have the potential for big growth but nothing is guaranteed in this world…or in the markets. The lesson, however, is to do your research and don’t let your emotions cloud your judgement! 

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The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders