For those of you that subscribe to the Wall Street Journal, Jason Zweig wrote a very interesting article about the perils of investing in pre-IPO private companies this past weekend. You should know that the impetus for this article was an email I sent to him in early January, and was the result of some personal research I conducted in 2024-2025 with reference to companies like StartEngine and Republic who offer opportunities to own shares of companies like SpaceX, OpenAI, Grammarly, etc. before they go public. I had the privilege of assisting Jason with the article and ended up with a quote within the article.
What I learned was that these "direct-to-investor" companies charge exorbitant fees to the funds that hold the shares (or shares of other funds that hold the shares). Some of these outfits (StartEngine in particular) typically buy the shares in one fund, mark up the shares as much as 40%, and then put them in the investor fund, so the investor is starting with a 40% headwind at the get-go. Then, they charge typical "carry" (profit share) at 20% when there is a liquidating event (like an IPO). To me, this is unconscionable, and it's one of the reasons I went in search of a better solution and found Aaron Dillon of AG Dillon Funds. I believe that this strategy can have some value for investors, but only if the fees and terms are investor friendly.
If you have a subscription, you can find it in the "Intelligent Investor" column that Jason writes, or at this link. I think he did a great job of summarizing the problem and explaining it in an understandable manner. Hopefully it helps shed light on a problem before too many people get burned.
Best regards,
Doug