Retail investors eager to invest in companies such as SpaceX, OpenAI, and Anthropic PBC are frantically buying related fund shares, driving up their prices. The share prices of some closed-end funds have surged to extremely high premium levels, raising market concerns over excessive valuations and investor risks. The assets held by these funds are sometimes acquired through special purpose vehicles (SPVs) or forward contracts, transactions that may introduce counterparty risk and execution risk. Meanwhile, companies like OpenAI have issued warnings that they may not recognize the validity of such transactions.
Last month, the size of one closed-end fund soared to approximately 3,000% of its underlying asset value, as the allure of tech companies triggered retail investor enthusiasm comparable to the “meme stock” craze of years past. For fund sellers, this exclusive investment advantage will soon disappear as tech companies rapidly move toward initial public offerings (IPOs). This is the latest example of speculative inflows into private markets, with a growing number of amateur investors diving into often opaque and illiquid assets without fully understanding the risks. Previously, given the overall volatility in private markets, valuation concerns were particularly pronounced, prompting some funds to limit redemptions.
Institutions such as Fundrise Innovation Fund LLC and Robinhood Ventures Fund I claim to provide access to investment targets traditionally available only to venture capital and institutional investors, stating that they are democratizing the market. Closed-end funds hold shares in well-known tech companies, offering retail investors the opportunity to buy shares when the funds go public. Owen Lamont, portfolio manager at Acadian Asset Management, said: “It makes sense for funds to go public before tech companies officially list; they should go public when the underlying assets are scarce rather than abundant.”
Some funds position themselves as venture capital vehicles for the public markets, but instead of investing in early-stage venture capital, they package shares of later-stage, pre-IPO companies into baskets. The average cost (including management fees and other expenses) for four funds investing in well-known tech companies is 3.6%. However, the surge in some fund share prices has raised concerns over excessive valuations. After Fundrise listed its Innovation Fund, its trading price once approached nearly 30 times its latest net asset value at the end of February. Lamont said: “Is it possible that SpaceX’s price could rise enough to offset the premium? Possible, but highly unlikely.”
Fundrise previously focused on real estate investments before pivoting to tech investments. The fund began trading on March 19 at $31.25 per share, and investors flocked in, driving the price to a peak of $575 on March 25 — a 3,000% premium over its per-share net asset value of $18.26 at the end of February. Subsequently, a short-selling firm issued a report pointing out the excessive premium, causing the share price to fall, and it now hovers around $85.
For some funds, investing in companies like OpenAI is not straightforward. OpenAI has stated that it neither endorses nor participates in any special purpose entities, forward contracts, or tokenized equity transactions, and warns that such practices could lead to “invalidation of the underlying equity.” Acadian’s Lamont noted: “This is a case where a closed-end fund claims to have legal contracts with the underlying stock, but the issuer disputes that claim.”
