Are closed-end discounts putting Anthropic on sale pre-IPO?

When a closed-end fund announces a tender, a merger, or an activist fight, what happens to its discount? CEF data tracks nearly 15 years of corporate actions and their discount outcomes for U.S. listed CEFs and BDCs, plus coverage of London Trusts and a growing list of ETFs. Built and human-check by CEF advisors, closed-end fund specialists for over 35 years. For advisors, allocators, sponsors and boards, CEFdata.com. Want to get in on a stock like Anthropic before it goes IPO? You can do it in closed-end funds, but is the cost worth it? John Colescott of CEF advisors is here to discuss it now on the Navigator. Welcome to the Navigator, which is all about all-weather active investing and plotting a course to financial success using closed-end funds. The Navigator's brought to you by the Active Investment Company Alliance, a unique industry organization representing the entire closed-end fund industry from fund sponsors, creators and managers down to users and investors. In the search for excellence beyond indexing, the Navigator is pointing you in the right directions. And today, we're looking into getting ahead of the market with closed-end funds that have shares or that may have shares or are buying shares on some of the market's hottest names and soon-to-be IPOs. We're having this discussion with John Colescott, president of CEF advisors. And if you want to learn more about the firm or dig into its data on closed-end funds for yourself, go to CEFdata.com. But John's also just written a piece on this subject that you can find on LinkedIn or by simply following the link we've got to it in today's show notes. John is also chairman of the Active Investment Company Alliance, which you can learn about at aicalliance.org. John Colescott, welcome back to the Navigator. I always enjoy being here, Chuck. John, everybody likes the idea of owning a piece of the next mega IPO. And while this is a story that plays out over and over again with every new big deal, the big deal right now is anthropic, where it's been suggested that the market valuation upon IPO could reach $2 trillion, which is more than double what anthropic was considered worth back in May when it did its last round of funding. There are some closed-end funds and interval funds with anthropic exposure now. Is this a smart way to get the stock, or is this an expensive way to get the stock? Yes, so first before we got to that idea, we screened the holdings database at CEFdata, covered almost 300,000 different positions, over 800 funds. And we're looking for the 25 most likely near-term USIPOs. And we found about almost $8 billion across those names, almost 157 funds had exposure of these ideas. But when it came down to it, well, Databricks right now is looking interesting around the $2 billion valuation and anthropic has a lot more juice and retail interest. And so we felt with that IPO likely coming soon, it's in eight funds. We decided to look at it and talk about different access to it, different wrappers and different risks versus opportunity in those funds, because in a way, what we all want, potentially exposure that IPO, we may forget what we're getting when we get in and the ways we can get out. And it's not quite as simple as I own a closed-end fund. It has shares because it's private stakes, it's what are they valued at, et cetera. And then there's a market that doesn't really necessarily know just how much any closed-end fund has of this and is the stake big enough to have a real impact on the fund and all that other stuff, right? It is. And so when we looked at that with the biggest bites of it and it came down to three funds, DXYZ, which is the largest allocation, BTX is a discounted tax to it, a listed closed-end fund. But it actually holds anthropic directly, unlike DXYZ, and then there's an interval fund, the ARC venture fund that has the direct exposure but a more complex wrapper that you have to consider if you're going to own it. And what's your conclusion on, is there a best way or a better way to own this? So you've got to think about how long you want to own it and whether you want to deal with issues like, so in an interval fund, if more capital is flowing in, because most pretty much inflow capital daily if they want, so imagine there was a $100 million interval fund, 10% exposure anthropic is the base case and they double their assets, you suddenly have 5% exposure as the next investor in that asset. And so you got to think about that, which would also be if it were an ETF exposure, there is some with exposure it's the same watering down of the impact because of that, the listed closed-end fund because of the fixed capital base, which is its large benefit, is a chance to not have water down effect, but you can't forget about discounts and premiums, which could impact. And so that's going to be impacting BTX and DXYZ. And then of course, if you're trying the biggest thing for the buck, then you may lean and avoid those other risk and just go, I want the biggest pop upside possible for my nav, and that's going to be, you know, the way you approach it. So again, we have our opinions, one we would hone for our clients right now, but we want to make sure that readers and listeners have a chance to digest and make their own decisions. The stakes that these funds can amass, are they truly meaningful in terms of their exposure and that yes, you're going to get exposure to anthropic, but it's going to be enough to deduce things because you could surround the next hot IPO with the last 10 IPO duds, it's not a good deal. It is. So the large exposure at DXYZ is a little over 14% based on their 6.30 net asset value. They lend you a core net asset value as a closed-end fund, kind of like a BDC. We don't have their most recent exposure data. You've got almost 9% in BTX and you have 4% in the arc interval fund. And so those are, I would say large allocations at a fund level. I mean, that's a large allocation. We look at closed-end funds, but it's definitely not a pure play. So that's the way I would think about it and consider other aspects like the expense ratio of a fund, like for example, DXYZ, it's a higher expense ratio of a trending lower, but because they have a big bucket of cash as a last report, it's actually a relatively high expense ratio. But the good news is, if you were to buy that fund, get the IPO and own it for less than two months, expense ratios, not as much pain as if you decided to own it for five years and have that math coming off your friction. And so I think that's an important piece is that component. It's an indirect ownership at DXYZ, which doesn't feel totally scary, but it does mean there's information that we can't look at that would confirm that it's actually in the feeder fund and approved by Enthropy Board. And we heard some of those stories with the SpaceX IPO, you know, people thought they had it, didn't get it. And so the way I think about that risk, it's light and low, but if it's true, it's material and terrible. And so that's one reason why we like the idea of the direct ownership if we were to lean BTX or the Arch-Inverbal Fund. The Destiny Tech 100 DXYZ, that fund's got a new manager. Especially if a fund can be sub-advised or whatever else is going on, does new manager have more or less or not much impact when it comes to the IPO plays or the pre-IPO plays that we're talking about here? First I thought there's a new manager as well. He dug deeper into the filing and it's actually the way they word it was, there's no material change to fees. Services are personnel, so it feels more like an internal reorgan and not a transaction of like small managers sells the big complex or whatnot, but it's a factor you must consider. Like, you know, if you think about it, honestly, I don't know the manager of that fund very well. I did bump into a board member at a conference last week, but we've not chatted more than that quick conversation versus if you think about, I mean, I don't know ARC well, but Kathy Woods has a reputation in the market for some leadership and you think she'd want to do more and keep growing her influence at the same time. I mean, BlackRock is not the largest asset management role, but they are obviously very focused on their 40 act practice, close end funds, and I'd happen to the manager. I'd met him a few times for that fund, and that gives us the type of confidence we like in what we're going after. You know, John, I know we always talk closed-end funds, but I also know that at C-E-F-Data.com, you've expanded a lot of what you're doing to include a lot of ETFs. I don't have to go with closed-end funds or interval funds to get exposure to IPOs and specifically to Anthropic. There are some ETFs, at least from the things I've read, that have exposure to Anthropic aren't there. And then assuming that I'm writing that, that there are some, how do you compare those to what you're seeing in the closed-end fund space? Yeah. So the way we think of it, and it really comes on a couple of moving parts, and one reason why I do enjoy this work, because it's not playing vanilla or easy, you've got to think about the win and how the fund itself marked its massive value with the holding it has. So was it May, or did they already market towards where they see it going based on their board's work? There's an ETF, a tour of ETF, I don't know personally, but it has a mid-teens, according to data I collected in the exposure, more like DXYZ. Has that same issue? So DXYZ actually was raised at a ton of stock when they were at a premium and they actually been between it. 200 premium in a 30 discount last year alone. So don't know the future, that's a six plus standard deviation of discounts and most of your listeners don't know what that means when I say it. But super uncommon didn't know as plausible without the financial crisis and that level of volatility. And so I'd say the watering down is a real impact. The actual pop possible from the mark that they're using as you got into the fund, either at the ETF wrapper and exposed to NAV, Oregon, through the interval, like if Cathy Woods arc doubles their assets in October before the IPO, it will be lower than 4%. If for some reason people were a dean 10% of the assets, which I doubt, it would be over 4%. Those are the moving parts of the inflow outflow mechanism of these structures. And that is really probably one reason why I like the more stable discount range on the lower end of it for the BlackRock fund. It's got other factors in the fact that we feel they're more experienced with the management, they're watching these pre-investments become public and then decide how to hold them if to hold them, how long to hold them. You've also got a situation where we are talking about IPO allocations and pre IPO shares, which depending on how the funds are structured and what they're doing, they may not have an allocation, they may have kind of a hope and a promise of an allocation. In a closed-end fund, if it's trading at a discount and that discount narrows because somebody's going, oh, they're talking about how they've got this promise and they don't get their allocation. I would imagine they're gonna be punished hard, but is that what you historically have seen like with SpaceX or any of these other big IPOs that we're drawing folks in? Did we see funds that were punished if they didn't deliver on their pre IPO promise? - You probably saw some news stories of people that thought that the SpaceX IPO and had a paperwork issue and got zero and it was not great for the brand and the revenue of their next effort. And so that's where I'd say it's super unlikely, but I'll say my clients are older, retired. We do some BTX report folios, but not because anthropic was coming. We like what we saw and it fits some pieces as we consider the equity bucket of our client portfolios. And that really goes back to where I really like the direct exposure and it lean just heavily at our firm to the BTX answer because of the fact that it's direct exposure, the fact that it can't be watered down, the fact that you're already trading at a discount and that it's almost 9% based on they've already, but they've already popped their net asset value, like it was a little bit lower mid year because they're showing where they believe it's marked. And this is my opinion based on the move. I can't guarantee it, I was not in that board room. And that's the stuff that we find important. So it doesn't mean you have a probability XYZ, is it a risk over 10% probably not? But in the world of outcomes, I've seen in 26 years and my father in his 50, sometimes you get insanely surprised by things you thought you knew were true and then you have to update your dictionary. - Well, John, one thing I know is that you do not look at funds even for exercises like this without figuring out which one you like the best and which one might go. Now you've mentioned that you've got some clients with BTX, so I have a suspicion of which way you might be leaning. But since we've talked about three funds, how do you size them up in terms of which one you're most likely to own and maybe which one if you had somebody saying, I really wanna play this IPO, would it be a different fund? - Yeah, so I'll cover it two ways. If you just want with least capital at risk, the lowest likely outcome, then your answer is the XYZ. It's currently trading below net asset value and they should have the exposure or they will have a lot of issues. If you worry about discount volatility, then you really should probably go into that ETF which I just found a ticker symbol and I lost it on L-A-Z-R, but I don't know it very well at all. I just researched it for this episode or the interval fund. But the interval fund has a much smaller location so it's enough juice, worse the squeeze of not getting your money back sooner. And those are things we really care about over the pop. I mean, so based on what we think could happen, 50% pops are reasonable for tech stocks in the IPO market though an educated guest with like many things in this market, DXYZ would pop seven in change, BTX 4 in change, ARC 2. And so that's why we'd suggest if you're gonna try to play this, research the fund like the other positions, like the structure, like research the manager, but you're gonna have to put a bigger allocation for this to give you a little alpha over other investments in your portfolio. This can't be a 1% position, probably has to be, I have trouble going over six for my clients. So six would be my number 'cause that's how I invest, but people could go higher if it made sense for their style and how they choose their own funds. And obviously the other thing in all this is you get the IPO, you're hoping that you're gonna get an IPO pop and then there's the obvious question of whether the fund is gonna hang on to the shares after the IPO, if there's the pop. And then there's the question of whether you, the investor are gonna hang on to the fund. So one, do you think that the funds are gonna stick with this or they're just playing the pop game? And two, in any of the recommendations you're making here, is it short run, play the game, or is it long run because it's not just about the pop? - So going back to the three closed-end instructors, which is our primary focus at ACA as well as CF advisors, lockups can apply to their holdings, no matter who they are. DXYZ has said publicly that they don't exit immediately in other, it's a scenario like they held Instacart for years at the IPO and then sold it slowly. And they still own SpaceX $133 million on their June 30th holdings update, which means they did not sell it right after. ARK has said they intend to own SpaceX through the listing into public markets with Circle and other investment. They trimmed it for concentration after a large run, but all with their lockups in mind. BTX, when we first did these notes, had no comments, but I have friends there, they reached out to me, and they basically said that they manage a range of products that combine both public and private exposure members a little bit over public in the BTX and private, but 30 private, it's pretty heavy. Historically, once a private company becomes public, a decision to continue to own the holding or exit is based on the evaluation on many things, including but not limited to the issuer, the market dynamics and overall portfolio construction. So imagine if it pops huge and then they're overweight for that sector is triple their base case, I'm just making these numbers up, then they're gonna be pushing down more because extra money and maybe they wanna balance out the nav in more than one industry, which is usually what a 40-at sponsor does, because it produces even quite a grand. So that's how we feel those managers will handle it, but again, we'll see what they say publicly once this happens and how true their history matches their future. And John, do you want in on Anthropic? So we have increased our exposure at our family as well as some of our clients in BTX after this research. This is research that didn't exist this week earlier, but because we already owned it and it's more of deciding, let's say it was a three-person position, we might take it to four or five. Again, the major factor governs the CF advisors is our clients are not going back to work as their goal. We love the tailwinds of discounts, tailwinds of nav performance. This is definitely a very interesting, unique, extra nav tailwind based on history and probability and that's the way we approach it. Well, okay, if you're a 25-year-old and you have a long life ahead of you, you could play this very differently than I would for our clients as CF advisors. John, great stuff, always great to chat with you. We'll do this again soon. Thanks for joining me on the Navigator. - Always a pleasure to be here. - The Navigator is a joint production of the Active Investment Company Alliance and Money Life with Chuck Jaffee. And yeah, I'm Chuck Jaffee. You can learn more about me and my show at MoneyLifeShow.com. You can just search for my show wherever you find your favorite podcasts. Now, if you want to search for more information on your favorite closed-end funds or maybe the ones that are going to be come your next favorites, go to aicalliance.org. That's the website for the Active Investment Company Alliance. Thanks to my guest, John Cole Scott, he's president of CEF Advisors and the chairman of the Active Investment Company Alliance. You can learn about his firm and dig into its research and data for yourself at cefdata.com. The Navigator podcast is available every Friday. Be sure you don't miss any of our episodes by following or subscribing on your favorite podcast app. We'll be back next week with more closed-end fund fun. Until then, happy investing, everybody.