Thursday , August 13 2020
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Overserved

Summary:
To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever. A friend of mine came into a meeting one morning looking a tad worse for wear and tear after a night out frequenting some Houston bars. Someone asked him how he was feeling. His response: “Clearly I was overserved.” I thought about that line – which I have enthusiastically stolen – while reading an email I got this morning from a multi-billion dollar asset manager promoting their new special purpose vehicle (SPV) to buy shares in SpaceX, shares which this asset manager will receive at the end of July as part of the SpaceX Series N funding round. Yes, Series N. The

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Overserved

A friend of mine came into a meeting one morning looking a tad worse for wear and tear after a night out frequenting some Houston bars. Someone asked him how he was feeling. His response: “Clearly I was overserved.”

I thought about that line – which I have enthusiastically stolen – while reading an email I got this morning from a multi-billion dollar asset manager promoting their new special purpose vehicle (SPV) to buy shares in SpaceX, shares which this asset manager will receive at the end of July as part of the SpaceX Series N funding round.

Yes, Series N. The letter N being the 14th letter of the English alphabet, and thus presumably the 14th private funding round for SpaceX.

To be clear, I’m not a client of this asset manager. I don’t know anyone at this asset manager. I have never had any relationship – personal or professional – with this asset manager. It’s an unsolicited blast email to some bcc list of “Dear Friends”.

The unsolicited blast email came with a few “Space X Confidential and Proprietary” powerpoint slides, chock full of chart crimes like this, where the specific $5 billion addressable market has more graphical surface area than the hand-waving $900 billion addressable market:

Overserved

And no, if you send me an unsolicited blast email asking me – a complete stranger – for money, I don’t care if you mark your deck “Confidential”. That’s true whether you’re a Nigerian email scammer or a multi-billion dollar asset manager, because the difference isn’t as great as you apparently think it is.

But I’m not here to talk about SpaceX. I don’t know anything about SpaceX other than that – apparently – they publish misleading graphics in their pitch decks. Certainly SpaceX would not be unique in that regard.

No, I’m here to talk about the terms this asset manager is asking for investing in their SPV.

For an existing client of this asset manager, which I am not, it’s a 1% annual management fee and a 10% carried interest for the asset manager.

For a new client of this asset manager, which I would be if I were so inclined and were a “qualified purchaser” (I’m not and not), it’s a 1.5% annual management fee and a 15% carried interest for the asset manager.

To be clear, this asset manager isn’t “managing” anything. I would be paying them 1.5% of my investment every year for access to this initial purchase of SpaceX shares. I would be giving my money to this multi-billion dollar asset manager, and they would in turn give most of the money to SpaceX to get shares in this Series N stock sale for the SPV. But the asset manager will keep a healthy chunk of my money in this SPV as cash to pay for “fund expenses” and (probably) their “management fee”, and my capital account will be debited as if it were cash every year for these expenses and fees.

But wait, there’s more …

No Limited Partner will be permitted to withdraw capital from the Fund without the General Partner’s consent, which may be granted or withheld in its sole discretion and which is generally not expected to be permitted. … As such, prospective investors should not invest unless they are prepared to retain their LP interest until the Fund liquidates, which investors should expect will not occur for a very significant period of time.

LOL.

That’s from the micro-font disclosures page. And yes, it means exactly what you think it means. Your investment is locked up … forever. And the asset manager will collect fees on your investment … forever.

There is no exit here unless SpaceX decides to do an IPO, and when Elon can do an (apparently) infinite number of private stock transactions at whatever valuation Elon’s heart desires, why would SpaceX ever do that?

Now you might do that anyway if employees and early investors clamor loudly enough for the liquidity that an IPO can give them, but this multi-billion dollar asset manager is showing a clever solution for that pressure: get all the liquidity you need by offloading your stock to the rubes AND collect an annual fee for your “generosity” AND get a 15% share of any profits if a miracle occurs and there is an IPO a decade from now.

Whee! Isn’t investing fun!

Who are the rubes? With a minimum investment of only $250,000 to participate in this SPV, it’s clear to me that this offering is being targeted at small “family offices”, the greater fool in the current Wall Street ecosystem.

Yes, this investment opportunity is limited to qualified purchasers, which means that you must have $5 million in investment assets to participate. The asset manager is doing this because having only QPs as investors will exempt the SPV from registering with the SEC under the Investment Company Act of 1940, which is a Big Deal for the asset manager.

Once upon a time, being a QP – i.e., having $5 million in investment assets – was a decent indicator that you were an “institutional investor”, a Big Boy who could take care of himself. Today, every Tom, Dick and Harry “family office” has $5 million in investment assets. It’s a total that’s well below the minimum that many blue chip investment advisors require before they will take you on as a client.

Everyone is all in a tizzy about day traders and Robinhood and Dave Portnoy. “Ooooh, they’re going to have such a hangover when the bubble pops. Ooooh, they don’t understand how investing works.”

Pffft. They’ll be fine.

The investors facing a hangover are small family offices, plied with endless offerings of fee-heavy SPVs and SPACs by multi-billion dollar asset managers. They’re the ones overserved by Wall Street today.


About Ben Hunt
Ben Hunt
He is the chief investment strategist at Salient, a $14 billion asset manager based in Houston and San Francisco, and the author of Epsilon Theory, a newsletter and website that examines markets through the lenses of game theory and history. Over 100,000 professional investors and allocators read Epsilon Theory for its fresh perspective into market dynamics.

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