How Can Family Offices Benefit from “Unicorn” Investing?

Perhaps the first image that comes to mind when one hears the word “Unicorn” is that of the mythical creature all too common in children’s fairytales, but for investors pioneering in this emerging field of the secondary market, the word signifies something far more tangible. In fact, for savvy investors, unicorns may just be the Holy Grail of finance.  

We talked with Impacts Capital advisor and President of Rainmaker Securities, Glen Anderson, about how family offices can benefit from this emerging investment category.

How do secondary’s (Unicorns) fit within a family office portfolio?

"Unicorns" are venture capital-backed private companies that are valued $1 billion or more.

With capital preservation often a key investment consideration for many family offices, investment in the venture capital asset class is often considered too high-risk. However, investing in Unicorns (venture capital-backed private companies that are valued $1 billion or more) is typically a less risky strategy than investing in seed and early stage companies. Unicorns more often have proven business models, global brands, substantial revenue, and profitability.”

“Also, many Unicorns are world beating companies, leading the most disruptive technology trends occurring in the world economy. By waiting for a public listing to gain exposure, Family Offices are likely missing the most important years of value creation.  A sample case in point is the ride-sharing market. Private ride-sharing Unicorns have raised approximately US$25 billion since 2010 and have a combined market capitalization of US$120 billion.” (Source: ValueWalk).

What are the Risk/Return benefits of Investing in late Stage Venture investing? 

“According to the Cambridge Associates Growth Equity Index, funds that employ late-stage venture investing strategies have produced 10.57% and 14.3% returns for the past 10 and 25-year period, respectively, versus 6.95% and 9.17% for the S&P 500 index respectively.”

What are the Investment advantages for the family offices?

“Key advantages of investing in Unicorns via private secondary markets are:”

• Invest in mature companies with proven business models and well-funded business plans• Get exposure to the equity earlier in the company's growth cycle• Experience a shorter expected holding period versus investing as an early stage venture investor

What are the two main structures commonly used in the Sector?  

• Direct method: Investors purchase shares from selling shareholders by getting the approval of the company to transact. Brokers organize/match buy and sell orders. After that the seller notifies the company of the proposed sale and once approval is granted, then the seller and investor sign a purchase agreement. The buyer then funds the transaction. As a final step, the company updates their share ledger and transfers the shares to the buyer, providing the buyer proof of ownership, closing the trade.• Special Purpose Vehicle (SPV) Method: The broker identifies a group of matching trades in the same security, and then creates an SPV to take custody of the shares. An offering memorandum is prepared and investors subscribe and send funds to the SPV. Once all the funds are received, the SPV notices the company to allow the SPV to transact as a single buyer. Once the company approves the transfer, the SPV purchases the shares from the selling shareholder(s), the company updates its share ledger and provides the SPV proof of ownership, closing the trade.

What is the typical transaction size and range:

A typical transaction size is in the range of $2 million - $10 million. For family offices and investors to obtain the most competitive pricing/terms, the typical transaction size is in the range of $5 million to $10 million. Larger transactions can typically be consummated via the Direct Method. For smaller transactions, the investor would typically need to transact through an SPV structure since companies will typically not approve small transactions.  

What are the fees involved in transacting in Private Secondary Transactions?

Depending on the transaction size and complexity, commission and fees range between 3% and 5% of the transaction amount. Lower commission percentages are associated with larger transactions. In most cases, the commissions are paid by the selling shareholders. However, there are certain situations whereby the investor pays the fee.  

What are the risks involved in transacting in private secondary transactions?

The following investment risks are present when compared to investments in public equities.

• Lack of liquidity• Higher volatility• Less information on current state business performance• More complicated transaction structures

In conclusion, many Unicorns are leaders of their respective market category, with proven business models, global brands, large and growing revenue and profitability. As such, they form a separate risk category than what is more traditionally considered venture capital investing. Yet, despite their maturity, many have and continue to generate outsized value creation for their shareholders. Consequently, investing in Unicorns can be a powerful source of alpha to a well-diversified portfolio.