With competition in the U.S. ETF industry intensifying, issuers are increasingly using private-company exposure to differentiate in a saturated market. What was once a niche product offering is quickly becoming a marketing tool, especially in a market where investors are increasingly looking for growth opportunities amid a period of prolonged IPO scarcity.
Private Companies Enter The ETF Space
There are now a number of ETFs that offer indirect exposure to well-known private companies through secondary-market investments or crossover strategies. The ERShares Private-Public Crossover ETF (NASDAQ:XOVR) is one such product that has gained widespread attention due to its investment in SpaceX. Late last year, the fund experienced a rapid increase in assets as speculation about an impending SpaceX IPO reached a fever pitch, as reported by Bloomberg, demonstrating the ability of private company names to be potent flow drivers.
More recently, actively managed ETFs have emerged that are taking this concept to the next level. More recent launches, such as the Baron First Principles ETF (NYSE:RONB), have taken larger investment positions in private companies such as SpaceX and xAI, in addition to public equities such as Tesla, Inc (NASDAQ:TSLA).
However, these allocations not only highlight the attractiveness of private exposure within the ETF structure but also represent a move towards more focused portfolio building.
Valuation And Liquidity Issues
Private companies, unlike publicly traded companies, do not benefit from continuous price discovery. Instead, their values are determined by fair value models that often reflect actual market transactions, thereby hiding valuations in portfolios traded daily, as Etf.com reasoned.
Liquidity further complicates the issue. ETF managers, facing inflows, may not be able to immediately increase their private exposure, thereby diluting it. However, in situations with large redemption requests, public exposure is often liquidated first, thereby increasing the weight of private assets in the remaining portfolio.
A Trade-Off For The Industry
These issues are not limited to a particular fund. As more ETFs turn to private company exposure to differentiate, industry experts warn that investors may be underestimating the concentration and liquidity risks inherent in these strategies.
For issuers, private exposure offers a unique way to stand out in a saturated ETF market. For investors, the trade-off may be a more complex risk profile that becomes evident when market conditions turn volatile.
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