Today’s biggest tech innovators aren’t publicly listed. Here’s how to access them

If you can dream it, tech will try to create it. And while we may not be flying around on our Back to the Future-esque hover boards yet, we do have artificial intelligence evolving rapidly, commercial rockets into space and robotics that are changing the face of healthcare and other industries. It’s an exciting time to be alive – and an exciting time to be an investor.

But, while some amazing advances are to be found in the biggest public companies such as the likes of Amazon or Microsoft, equally some of the biggest innovations to come are in the private market. After all, what we see in the publicly listed space is really the tip of the iceberg.

Christian Munafo, chief investment officer for Liberty Street Advisors, regularly asks his clients a trivia question – what percentage of US companies generating more than $100m in revenue do you think are private. The answer might surprise you.

“There’s a study we found that we tried to replicate that said 90% are private. We came up with 74% but whether it’s seven out of 10 or nine out of 10, it’s the same answer. If you don’t have access to the private economy, you’re missing out on most of the economy,” Munafo says.

Knowing this is one thing. Investing in it is an entirely different matter – after all, venture capital in private companies is notoriously opaque, volatile, illiquid and inaccessible to investors, even more so if you focus on US companies. That's before you even factor that traditionally, access to private companies has only been available to institutional and high net worth investors through high minimum, complex and paperwork laden private placement vehicles.

Munafo believes there’s a sweet spot that changes the game though. He also believes it should be accessible to all investors, after all, Liberty Street has spent the last decade offering exposure with low minimum investments, a daily NAV, a quarterly redemption program, no performance fees and more streamlined tax reporting. 

In this interview, Munafo shares Liberty Street’s approach and the tech opportunities he likes. It’s not just AI either.

The sweet spot in venture capital

While people often focus on venture capital as the early-stage company looking for backing to develop a great idea, it is actually very broad.

“There’s early stage which is the proverbial guy or girl in a garage trying to whiteboard the next great ideas. In late stage, they’ve taken that idea to being an actual proven technology with a market fit. They’re generating material revenues at hyper-growth rates and they’re now in the scaling-risk segment,” says Munafo.

The companies Munafo focuses on sit in the late stage – usually not in the buy-out stage where they are likely to be holding debt.

“The reason for this is typically these high-growth businesses are often still investing in their own businesses. If you’re not a highly profitable cash flowing business, it’s often hard to raise debt. As a result, they are also typically less exposed to interest rates,” he says.

Some of the benefits of this section of venture capital include proven track records and market position, lower risk compared to early-stage companies and often already profitable.

It’s also worth noting that more companies today are staying private for longer – or not intending to go public at all. Munafo credits this to a few factors.

“One of the main reasons for this proliferation of companies staying private for longer is avoiding regulatory and administration burdens, the second reason is costs to list and the last reason is that the capital pool for alternative asset classes has grown dramatically and is able to service private businesses for longer,” Munafo says.

He also points out that staying private can support tech disruptors in their mission to focus on innovation rather than hitting quarterly earnings targets for shareholders. Going public means being exposed to volatility so staying private can allow for better focus and predictability of financials and forecasts.

Liberty Street invest in these companies in the secondary market – thus avoiding the risk and challenge of identifying winners and losers in the early stages. The secondary market entails buying positions or assets in a company from another investor in that company.

“If you’re looking to sell your interest in a fund, someone can buy your limited partnership interest. If you’re a direct investor in a company, someone can look to buy the direct investment you hold in that company from you,” Munafo explains.

The opaque nature of private companies and structural illiquidity can create opportunities for buyers on the secondary market to negotiate more favourable terms or buy at a discount, particularly for those investors who know the market and industry well and can recognise a suitable opportunity when it comes up.

How to bring liquidity to an illiquid asset

Buying later stage private companies and using the secondary market go some way towards creating liquidity in this often-illiquid space, but Liberty Street goes a step further to ensure it can offer quarterly redemption liquidity (to a point) for investors.

“Every quarter, we allow for up to 5% of Fund assets to be redeemed, which requires keeping 5% cash on hand for a potential full redemption,” says Munafo.

“We also manage an excess cash reserve because there are always new deals coming in that we want to keep powder dry for and at any given time, we’ll have deals that we’re in the process of closing.”

What this comes to is a cash balance of between 10-20% of the portfolio and when there are proceeds from companies going public or being acquired, these funds are used both for investing but also for liquidity management.

Where the big opportunities lie in late-stage venture capital

For Liberty Street, it’s all about technology, and with good reason.

“If you think about it, there’s not many sectors of the economy that are not being touched by technology,” Munafo says.

He lists some of the big tech innovations of our times: rapidly improving computational processing, artificial intelligence and machine learning.

“We think there’s big applications for AI outside of just helping our children with their homework or creating cool images. Think about manufacturing and industrial applications, along with healthcare and consumer goods,” says Munafo.

He also likes companies that are focusing on solving cybersecurity vulnerabilities, big data and analytics, along with agricultural technology.

But one area of innovation Munafo is a particular advocate of is the space economy – and it’s not something we discuss much from an investment perspective in Australia.

The space economy – more than commercial flights to the moon

“We look at where we’re seeing capital flow. There’s a massive amount of private, government and corporate capital being allocated to the space economy. We know from experience that there are therefore opportunities for us to generate alpha,” says Munafo.

The Bank of America anticipates that the space industry will grow to over $1.1tr by 2030 and private sector funding in space-related companies jumped to over $10bn in 2021.

“The space economy is really evolving. There’s the companies like SpaceX that are proving the ability to experience what it’s like to travel beyond Earth’s orbit through their launch capabilities, but there’s also the need for communication improvements through satellites like SpaceX’s Starlink,” says Munafo.

He holds companies like Axiom Space which recently won a NASA contract to build the next international space station and Relativity Space which creates 3D printed rockets.

The use of satellites and atmosphere to improve connectivity and communications is often missed when people think of the space economy. Munafo points out that satellite communication could be a gamechanger for emerging economies and regions. It’s also an area where the private sector is increasingly stepping up as governments recognise they can’t cover all aspects perfectly.

Munafo also points to opportunities to build out infrastructure and hardware that is space linked (and space colonisation related – mission to mars anyone?). Either way, it’s a diverse space which needs servicing in a range of ways which spells opportunity for investors with the time to map out the area and key demand spots.

A final word of advice: the characteristics of success

When it comes to venture capital, you obviously need to take a fundamental approach. While that means looking at thematics, where capital flow is headed, the quality of a company and the potential profitability of the technology, there’s another factor Munafo has noticed over time. And this relates to the management team.

“Some of the best management teams I’ve experienced are the most paranoid. It’s a valuable characteristic because they’re always looking out for what can go wrong, they’re cautious of getting too comfortable and they’re always looking ahead,” he says.

But you also need to balance this with optimists who are shooting for the stars, which means balancing out and complementing personalities across management and across the board.

“Knowing what you don’t know and figuring it out is a trait of some of the best companies and management teams I’ve seen, and we try to emulate that ourselves.”

It’s a piece of advice you can apply to investing, as well as to personal life. Plan for every outcome, surround yourself with people of skillsets that can complement and add to yours and aim high.

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Liberty Street Advisors have partnered with GAM Investments to offer Australian investors access to their strategy. 

To learn more about the GAM LSA Private Shares fund and receive your investor pack, visit their website here.