Democratising access to private innovation

Despite being a notoriously difficult asset class to access for the “everyday” investor, private shares has risen up the ranks as a notable member of the alternatives crowd helping investors to buck the traditional trend.

That’s where GAM Investments’ LSA Private Shares AU I Fund comes in, winning the Emerging Funds category at the Financial Newswire/SQM Research Fund Manager of the Year Awards 2023 – a testament to the changing tides of investing, especially in Australia.

“We think our Fund’s ability to democratise access to one of the most exciting, hard-to-access segments of the economy with an administratively and economically efficient wrapper is a major factor,” Christian Munafo, CIO of US-based Liberty Street Advisors and strategy manager, told Financial Newswire.

“Furthermore, our investment team’s domain expertise, transaction experience and extensive network have allowed to establish a robust initial portfolio of high-calibre, late-stage private innovation companies within just 18 months of launch… and we are just getting started.

“Also, our ability to optimise market dislocations has enabled us to negotiate very favourable transaction terms.”

Having only been in market for one-and-a-half years and returning 32.99 per cent in the year to date, Munafo attributes the fund’s meteoric success not only to a unique strategy that prioritises asset democratisation, but also to “market dislocations… [that] have created a very compelling environment for capital deployment”.

“First, our focus is on late-stage, private innovation companies that are highly differentiated, typically generating more than $50M in revenue with strong growth, on a near term path to profitability (if not already profitable), backed by strong investor syndicates, operated by experienced management teams, and likely to exit in 2-4 years,” Munafo said, speaking on the fund’s strategy.

“Second, we look to identify areas of friction inside the ownership of these companies that we can help solve with creative liquidity solutions, and then continue supporting the companies in various ways.

“Third, our team is extremely disciplined, process oriented and follows a comprehensive due diligence framework that helps optimise asset selection and transaction structuring. And fourth, having a long-term perspective is paramount to benefit from the capital appreciation and exit events that make this asset close so intriguing.

“Leveraging those key principles, we then look to construct a diversified portfolio for our investors with an attractive risk-adjusted return profile and low correlation to most traditional equity strategies.”

The fund seized the opportunity to provide broader access to “late-stage, private innovation companies”, especially as the seasoned management team sensed the market shift to companies staying private for longer.

“[Private companies] are growing into much larger businesses inside the private markets which means that your average public market investor may be missing out on significant capital appreciation before these companies go public,” Munafo said.

“Furthermore, only one-third of these private companies typically list on public exchanges (two-thirds have historically been acquired) which means that public market investors who wait for entry onto listed exchanges are also missing out on a significant segment of the addressable market.

“One of our Fund’s major differentiators compared to peers is the underlying fund structure itself which allows for easier and daily subscription, daily valuations, significantly lower minimum investment amounts, a semi-liquid feature with quarterly redemptions up to 5% of Fund assets, no capital calls, evergreen duration, no performance fees and more efficient tax reporting.

“Evergreen duration means not a typical private equity or venture capital style fund with a specific vintage, fixed investment period and fund life – [it’s] more like a mutual fund.”

The team has also capitalised on trending market commentary projecting an outlook for alternative assets under management (AUM) across real estate, infrastructure, credit, private equity buyout, venture capital and more to double from approximately $9 trillion to $18 trillion over the next four years.

Munafo said both advisers and their clients are driving the shift away from a traditional 60/40 equity/fixed income portfolio composition and are increasing exposure to alternatives, a helpful tailwind for the fund as it expands its horizons and continues to deliver.

“We believe this demand combined with wider democratization through more investor-friendly fund structures like ours will continue driving demand for strategies like ours,” he said.

“We tend to focus on sectors including the Space Economy, Cybersecurity, Big Data/Analytics, Digital Health, Fintech and all things Artificial Intelligence/Machine Learning related.

“AI/ML has been around for decades, but significant improvements in computational processing power and speeds have created an entirely new set of use cases which is very exciting and disruptive.

“These areas are already represented by the Fund, and we will continue building out additional exposure to these and other market segments.”