Are Private Markets Worth Chasing In an ETF?
The SpaceX IPO is one of the most anticipated IPOs of this decade, but should your clients be gaining early access to it via ETF? Dave Nadig, Sumit Roy, and Conor MacWilliams had an honest conversation at Future Proof Citywide about the potentials and pitfalls they see in the current private equity ETF landscape.
Private equity became all the hype in the last year with investors clamoring to gain access to companies like SpaceX through the ETF wrapper. In this conversation from the ETF Beach House at Future Proof Citywide, Dave Nadig, President & Director of Research, sat down to talk the intersection of private markets and ETFs with Conor MacWilliams, owner of Outer Beach Consultancy at the time of recording, and Sumit Roy, Senior ETF Analyst at ETF.com.
Investing in the private markets through an ETF comes with a long list of logistical challenges for the fund structure itself. At the top of the list sits the very real issue of liquidity mismatch, as private equity investments are designed to be illiquid. Tying up capital in these types of assets can create significant issues when managing portfolio inflows, outflows, weightings, and more. Additionally, many of the funds carry a high price tag to gain access to a range of venture companies that often underperform or collapse entirely, in a process that remains entirely opaque to investors. And when companies do outperform, the ETFs generally do not reflect the gains experienced by the company itself. It’s also worth noting that investors shouldn’t overlook the regulatory uncertainty currently happening in the space with ETFs that currently carry ballooning exposures to private companies despite the 15% limits on private market exposures.
Though the private market seems to semi-regularly deliver highly anticipated and ultimately successful companies such as Klarna or Reddit, most companies take years to go public, making them an unpredictable and long-term investment that may or may not eventually pay out. Catching a fast-tracked company like SpaceX pre-IPO is the exception for investing in the space, not the rule. While it’s easy to get caught up in all the hype, generational investment opportunities of the scale like SpaceX don’t come around often, and even when they do, ETF investors often don’t see the gains reflected in their portfolio.
