Brad Hoppmann at Uncommon Wisdom Daily is pitching his “entry level” Cash Flow Kings newsletter by promising two “secret” investments that will help you profit from the “Fall of the Wall” … so what’s he talking about?
Well, the “Wall” is, of course, his metaphor for what a lot of folks, particularly the small investors he’s trying to convince to subscribe to his newsletter, believe to be the truth: Wall Street is set up to protect its own and keep the info and the best investments for “insiders”.
And I hate to cut to the chase too quickly, but he’s essentially saying that crowdfunding/crowdvesting (or whatever name you choose) is going to pull down this wall.
Here’s a sample from the intro:
“About 220 years ago, a small group of powerful men built a Wall.
“To hide the greatest money-making secrets in history from the rest of America.
“Behind this Wall lies the truth about Wall Street’s corrupt empire.
“Opportunities that have created some of the richest men in history …
“Information that has allowed certain people to make amounts of money most Americans can’t even comprehend …
“Even power and privilege that allows them to front run the entire stock market.
“In short, this Wall has divided our country — and our financial markets — into two very different sides.
“On one side are those who live and operate inside the Wall — a very small group of the wealthy elite who live in extravagance and luxury.
“On the other side is everyone else — an oppressed majority who live off the scraps of this corrupt system and have been on the losing end of Wall Street’s broken promises far too many times.”
I have a great deal of sympathy for the view that the richest of the rich are defending their “Wall,” and I regret that the rise (again) of the financier class has been so dramatic and has brought such a wildly disparate distribution of wealth… though using that to sell a “secret” investment idea is a little silly.
But we’ll leave that philosophical argument for another day — let’s move on and see how Hoppmann thinks this wall will come down, and how we can profit… even if it doesn’t mean we’ll be joining Steve Schwarzman in hosting celebrity-studded birthday parties for ourselves.
He says that the “Wall” was completed in 1933 with the passage of the Securities Act, and what he really means is that the move to “protect” unaccredited investors was actually a way to keep the good stuff for the accredited investors — that’s what the SEC calls the folks who have enough money that they should be financially sophisticated and able to do careful research (though they often are neither, of course) and, perhaps more importantly, can afford to lose a lot of their capital, and therefore shouldn’t require much regulatory protection. You’ll see the term if you try to invest in a hedge fund or other restricted investment, all you have to do to be “accredited” and therefore (in Hoppmans terms) be on the other side of the wall is have income of over $200,000 or assets (aside from your home, usually) of over $1 million.
Hoppman refers to this accredited investor rule using the term “Elite investor status” — here’s a bit more from the ad:
“You see, in 1933 the United States government passed the Securities Act, and with it what I like to call ‘Elite-Investor Status.’
“Those who obtained ‘Elite-Investor Status’ under this new act were fast-tracked inside the Wall and given special access to investments the rest of the public were outlawed from.
“And these types of investments presented opportunities to make amounts of money not possible through the normal stock market.
“Today, to obtain ‘Elite-Investor Status’ you either need to be worth $1 million or more, or have a yearly income of $200,000 or more.
“To put that into perspective only about 5% of Americans qualify.
“So the other 95%, or more than 302 million Americans, are automatically denied ‘Elite-Investor Status.’
“And with it the ability to invest in companies before they’re released to the public, or in other words, investments in private equity.
“This is exactly what the Wall has protected. Up until now …
“Because for the first time, you can now access to these same kinds of investments, which have the potential to turn small sums of money into fortunes.
“Take Facebook. According to Business Insider … the Facebook IPO alone created more than 1,000 millionaires …
“And a few early investors made Billions!
“Peter Thiel, the founder of PayPal and one of Facebook’s first big investors, turned a $500,000 stake in the company into more than $1 billion.
“That’s more than a 200,000% return on capital.”
Of course, essentially all those millionaires created by the Facebook IPO were Facebook employees (I assume that all the venture investors in Facebook were multi-millionaires already, Mark Zuckerberg didn’t solicit many $5,000 investments), and Facebook shares were bought and sold many times by those employees for years before the IPO so it’s a bit disingenuous to say this all happened at the IPO, Facebook shares were trading at a higher price six months before the IPO than they were six months after the IPO. Though, yes, the shares that employees and insiders were selling could only be bought directly by accredited investors before the IPO.
And the reason that you’ll always see Peter Thiel’s 200,000% return cited by folks who are pitching private equity-type investments is that it’s incredible — and rare, and unusual. Facebook was a one in a million company, and Thiel bought in extremely early because of personal connections, skill, and expertise. And luck.
So yes, this is the point where I should remind you that private equity and venture capital investments, which are generally illiquid and come with high fees, also have the potential to turn fortunes into small sums of money… and that venture capital investors watch their investee companies very closely, often serving on the board, exerting substantial influence over strategy, or getting frequent and detailed reports that are far beyond what investors in a public company would receive.
Most private equity investments are decidedly not passive “lottery ticket” winners, and most early stage venture funded companies fail (estimates for the failure rate range from 70-90% in most places I’ve seen — with “failure” meaning “out of business within five years”). There are a handful of venture capital firms who repeatedly make billion-dollar “exits” from early investments, but they’re also high-cost operations who fund dozens of failures for every huge winner that emerges — and you don’t often hear about the failed investments, or the VC firms who haven’t broken through to be among the “most connected” early stage investors like Sequoia, Kleiner Perkins or Greylock who get the best crack at investing in new companies on the best terms.
And Hoppman implies that you’ve got a chance to be among that group of windfall billionaires with the advent of crowdfunding — a little VC investing might help to diversify a portfolio, but massive returns are almost certainly not going to happen (sorry), no matter how well you understand the emerging world of crowdfunding or the various exchanges and intermediaries that are being set up to
separate novice investors from their money as they fund hundreds of me-too tech companies and lackluster real estate developments. It’s very early days in those kinds of investments, and the wild west nature of this is going to lead to a lot of scams and losses, I expect, as the pump-and-dump stock promoter crowd gets its hooks into a world that’s even less well-regulated than the over the counter markets — but then Hoppman does also imply that there’s a safer and more immediate way to profit from the fall of this “wall.” Here’s more from the ad:
“Of course, you may also prefer to get an immediate stake in all sorts of crowd funded companies for better diversification.
“Which is why in this research report, I’m also going to share two special investments you can make right now through the traditional stock market to help you start cashing in on this financial renaissance.
“The first is a special fund that is diversified in the best and most promising venture capital firms poised to profit as crowdfunding takes off.
“The fund invests in 40 to 75 listed private equity companies (including BDCs, MLPs, and other businesses that lend capital or provide services to privately held companies).
“And since the bottom of the financial crisis, this fund has outpaced the broader markets quite nicely …
“I believe with the coming of age of crowdfunding, this particular investment will only continue to grow in value … and again, you can access it today right from your regular brokerage account.”
Huh. So that’s kind of like saying, “the insiders got rich building this ‘wall’ that restricts other people from investing the way they do, but they’re going to get even richer as the wall comes down and everyone can do what they do.”
What Hoppmann is hinting at here is the Invesco PowerShares Global Listed Private Equity Portfolio (PSP), which is an ETF that holds shares of many of the venture and private equity investors — those who invest their own funds, and those who manage money for others.
The investment might rise in value, but I’ve got a little trouble with the logic — the companies held by this fund will probably do fine, changes in tax policy would have a much bigger impact on them than crowdfunding, but I don’t see why they should do particularly well just because the era of the “accredited investor” requirement is fading.
You can see the details about the ETF here if you’re curious, it’s a global fund so there are a lot of companies in the fund that won’t be familiar to many US investors — in most cases, these are not conventional private equity or venture capital fund managers, they’re effectively investment conglomerates that buy and sell companies. Ones that might ring a bell among their top ten holdings are the Canadian conglomerate Onex (OCX in Toronto), the large US BDC Ares Capital (ARCC), and Berkshire Hathaway wannabees Leucadia (LUK) and Fosun (656 in Hong Kong) (I own and have written several times about Fosun and Leucadia). I don’t know all of the other investments they hold, but once you get out of the top ten there are a bunch more US BDCs as well as more recognizable private equity firms like Blackstone, KKR, Carlyle Group and the like.
Any overriding risk that would apply to all of these, absent just a global stock market slowdown that makes all financial assets less valuable, would probably be primarily related to interest rates — almost all of these conglomerates and investment houses are heavily levered, and have been able to borrow lots of money at very low rates to help them expand more quickly and make more and larger investments. If interest rates spike up or if regulatory changes make their income statement otherwise less happy (like higher taxes on carried interest, for the money managers in the group), then things could change for a lot of these companies en masse.
I don’t see any close connection to this expected “revolution” in disaggregated finance, either good or bad, but certainly a lot of the companies in the ETF are interesting and it has outperformed the S&P 500 since the 2009 lows. During almost any other long time period, it has done far worse than the S&P — so it might be that this is one you’d be more interested in after a real crash, over the past five years or ten years it has done far worse than the S&P 500.
Here are a couple total return charts, to give you an idea of the different stories you can tell about an investment just by moving the chart dates around a little bit (you have to use total return with this one, not just price, because most of the gain has come from dividends — which are variable, and might be low for at least the immediate future given the weakness at some of the dividend-paying companies in the ETF):
March 3, 2009 to the present
October 2006 (PSP start date) to the present:
So no, it’s not terrible and it’s not necessarily a ridiculous investment — but during the 10 years or so that PSP has been traded, you’d have to have timed it very well to make market-beating profits in this ETF.
Then Hoppmann does tease one other way to break through that “wall” and buy the hot new, young companies:
“On top of that, I’ll also tell you about one other ‘readymade’ crowdfunding investment vehicle that few people know about.
“This is an actively managed fund that invests in a diversified portfolio of late-stage, venture-backed, private companies.
“In plain English, that means it skips the riskier early-stage venture capital investments and focuses on the growth/later stage periods. Companies in this middle phase tend to be more focused on increasing their revenues. They also tend to carry lower risks.
“Currently, this fund has 31 holdings. Here are a few companies it has invested in:
- Kabam: Mobile app game developer (four titles that have grossed more than $100 million each)
- Jawbone: Wearable technology and audio devices
- AlienVault: All-in-one cyber security platform
- DocuSign: Digital transaction management (a market expected to grow 50-fold by 2020)
- SoFi: Online peer-to-peer lending platform (personal loans, student loans, and mortgages)
- Spotify: Online music service (with over 10 million paying subscribers)”
And he says that as of 6/30/15 the fund had returned 23.7% net of sales charge (versus 13.48% for the S&P 500) — and it turns out that late June/early July of last year was the high point in price for this fund so far, but what Hoppmann is teasing here is the SharesPost 100 Fund (PRIVX), which is an atypical, limited liquidity (interval) closed-end mutual fund that invests in pre-public venture-funded companies.
PRIVX is a fund that has come up in these pages before, I wrote about it when Michael Robinson was teasing it as a way to get in to hot private companies like DocuSign (it wasn’t at the time — DocuSign was their smallest position, but sometime between September and December 2015 it became their largest holding). The fund is down 15% or so from those highs last Summer, but is still doing better than the S&P 500 — it comes with a lot of rules and stipulations, but you can buy it at net asset value if you’re interested (you can only redeem shares once a quarter, and you can’t necessarily redeem them all, it’s difficult or impossible to buy without a sales load, the NAV is based on estimates of the value of private companies, etc.).
After I wrote about the silliness of Robinson’s promotion of the SharesPost 100 Fund last Fall, the fund’s manager, Sven Weber, contacted me to follow up (and to say, in not so many words, that he agreed Robinson was wildly overpromising), I posted my notes after my conversation with Weber in a Friday File for the Irregulars, and I’ve just unlocked that article so anyone can go read it if they’d like a bit more background on the fund. The portfolio and valuation have changed a bit since then, but my opinion hasn’t.
Interesting, but won’t make you rich — and they’re focused on companies that are already of considerable size and economically viable, within a few years of being ready to go public (or get acquired by a larger firm), so it should be less risky than earlier-stage VC funding… and also less likely to produce windfall profits. This strategy would have had them trying to buy Facebook, for example, maybe in 2008 or 2010, not in 2004 when Peter Thiel made his investment (and when Facebook had just one million users on a couple college campuses, that was even before Zuckerberg rejected Friendster’s $10 million buyout offer). That’s just an example, Facebook was so aggressively chased by private equity in the last several years of its life as a public firm that Weber might not have even tried, he has noted a lack of interest in buying the hot, large private firms that are very richly valued (like Uber now, for example), partly because a small fund doesn’t have any possible edge with those firms.
So there you have it — Hoppmann is selling you his ideas about Crowdfunding and other private equity/venture capital investing avenues that have opened up with recent changes to regulation, and I think this new “wild west” world of crowd funded venture capital probably provides a lot more risk than it does potential return for individual investors right now…. but the two funds he notes as “immediate” options for this new world do have at least some potential appeal (even if they won’t really benefit from crowdfunding or the lack of “accredited investor” rules — and in the case of SharesPost, they might be hurt by the new regulations since they’ll bring more competition for individual investor dollars). Sound like enough to get you excited, even if it doesn’t mean you’re going to get 200,000% returns? Let us know with a comment below.
Disclosure: I have funds invested with the SharesPost 100 Fund, and also own shares of both Fosun and Leucadia. I don’t own any other investments mentioned above, and won’t trade any of them for at least three days.
P.S. Hoppmann goes on to hint at some other investment ideas that have been brought on by “Financial Technology,’ including a way to get higher returns by “turning the tables on Wall Street” — that seems to be mostly a reference to the “peer to peer lending” programs offered by folks like Prosper and LendingClub, where investors can buy chopped-up loans to individual borrowers in $25 increments and therefore diversify and earn a much-higher-than-the-bank return (with, of course, additional risk that’s still largely unknown, given that none of these companies were operating at scale the last time we had a recession). If you’re curious about this, I wrote about Lending Club when it was teased by a different newsletter as a way to buy “$25 Retirement Notes”. I do still have a LendingClub investor account, for what it’s worth, my account is still small and is largely working fine and generating above-expected returns (though the first “in the grace period” warning has just popped up, indicating at least a late payment on one of my $25 notes).