Investment
OPEN is a hybrid indexing and fund management company backed by the New York Stock Exchange. They are creating best-in-class private market indices and associated fund products that track those indices.
These index products offer lower fees, diversification, and ultimately listed market liquidity, enabling OPEN to capture a large share of the unaddressed TAM in privates.
OPEN is the second-ever early-stage company backed by the New York Stock Exchange, working to become a bulk player in Growth. We launch private market indices and associated to-be-listed funds that offer lower fees, enhanced liquidity, and diversification while enabling retail access to privates for the first time.
Fund Strategy
The 50 largest venture capital-backed US private companies have seen material declines in their valuations over the last year (~45% on average).* Despite these declines, the index constituents are fundamentally sound companies.
The average annual revenue of the top 50 pre-IPO companies is $2.2bn and several of OPEN’s Unicorn™ Index constituents would qualify for the S&P 500 if they were public companies.
All to say, we firmly believe that these companies will go public once IPO markets recover and that purchasing shares of these companies now via the secondary market is timely, with, we believe, significant potential upside.
OPEN’s first fund, the OPEN Unicorn Fund, LP, looks to capture this market opportunity. The OPEN Unicorn™ Fund, LP is a Form D, secondaries fund that tracks an overlying index of the 50 largest venture capital-backed US private companies, including names like SpaceX, Stripe, Fanatics, etc. The fund will hold 3-4x more companies than a traditional secondary fund.
Investors can purchase fund units in OPEN’s Unicorn™ Index Fund for 2% management fee and no performance fee – a significantly lower fee framework than the typical late-stage venture fund. OPEN also intends to offer distribution flexibility best aligned with investors’ individual liquidity needs and OPEN’s mission to bring retail access to this asset class.
*Discount calculated based on latest available pricing as of February 2024.
Additional Market Opportunity Commentary
Companies are staying private longer, and as a result, access to these names and subsequent upside is being denied to a larger universe of investors.
Historically, pre-IPO late-stage venture capital investments have typically generated higher returns than any other stage in the asset life cycle. On average, a Series H investor will experience returns more than double that of an investor who enters at an IPO offer price.
For example, in a study conducted on 147 US-based companies that went public between 2010-2021, participating in private markets resulted in a 66.0% gain on investment six months after IPO, while purchasing on the first trading day close price resulted in a 1.4% loss (Source: Rao, Santosh. 05/09/2022. “Pre and Post-IPO Returns Analysis.” Figure 12.).
Returns
Compared to early-stage venture companies, late-stage VC offers competitive returns with lower risk. The preferable risk-adjusted return profile of late-stage venture can be attributed to more established business models, greater marketplace traction, and lower failure rates. Over the past five years, bankruptcies would have been rare in the Unicorn™ Index.
Liquidity
Since late-stage growth funds typically seek to invest in companies one to three years before IPO, they typically offer a faster return on capital than earlier-stage VC funds (i.e., average lockups of 7-10 years). Such more immediate distributions allow capital allocators better liquidity management and support for their own liabilities and spending needs.
Valuation Discounts
Late-stage companies typically trade at lower valuations than their publicly traded peers due to their inherent risk. As a result, investors can capture a more significant portion of companiesʼ growth potential by investing before an IPO or other liquidity event.
Private VC-backed company valuations are materially down from precedent-setting 2020-2021 highs.
Late-stage startups have seen their valuations decrease significantly, and the IPO market is effectively closed until the market receives more clarity around the impact of interest rate hikes. However, once the Fed begins to pause or slow monetary tightening, equity financing markets should recover as capital becomes more readily available.
Even if macroeconomic conditions continue to prolong the IPO drought or even drive valuations further down, investors in top companies that produce long-term value creation are poised to reap sizable returns when the market eventually recovers. Additionally, due to the fall in both public and private valuations, there is a significant backlog of companies ready to IPO that are simply waiting for this market to recover.
Pitchbook estimates there are currently over 200 companies that would be ready to IPO today, and contends that once markets do recover, it could take years to clear the backlog. In the years directly following the 2008 Great Recession, many VC-backed unicorns IPOʼd during that market recovery and experienced significant valuation increases from last private round. OPEN believes that due to the current price dislocation between latest primary rounds and secondary market prices, now is an opportune moment to get into pre-IPO assets.
Secondary Valuation Declines
Secondary market data also supports the decline in late-stage VC valuations. Over the first half of 2022, there was a significant imbalance of sell orders over buy orders, leading to a high in May 2022, when ask orders were approximately 84% of all orders.
This has resulted in a significant number of private companies trading at 12-month lows. Since a peak in May, the overweight order book toward sellers has begun to marginally correct.
Markets for UIF constituents have also continued their contraction over the course of the last year, with constituents nearly universally down in double digits, and certain, particularly exposed names, such as Thrasio and OpenSea, down over 84% (Source: Zanbato).
What happens if valuations slide further?
In the long term, OPEN believes the UIF is a sound investment even if valuations continue to decline. Companies without scalable, sustainable business models and sufficient cash to finance operations through a downturn may fail.
However, stronger companies, such as the unicorn constituents in the UIF, should do well and grow into their 2021 valuations over time. For instance, a company funded at 20x revenue experiencing 60% annual revenue growth would have an implied valuation of 12.5x revenue one year hence.
Hyper-growth companies remain actively pursued and may continue to raise capital at healthy premiums. Robust fundraising may also mean that down rounds remain limited in the near term.
Many late-stage VC companies are now well capitalized; some have sufficient runway to fund operations for as long as several years without needing to return to capital markets, especially if that means accepting a down round.
Thus even if there is a prolonged economic downturn, many of these companies will be able to weather the storm until the market begins to recover, meaning secondary markets will remain the primary avenue to capture value.
