Written in partnership with Kody Boye
Image credit: Collective
For many decades, exchange funds, also known as swap funds, have been used by high-net-worth investors to diversify their holdings by pooling their stocks into a single fund. This minimizes risk, as investors are able to substitute a concentrated stock position with the same value of diversified stocks, resulting in a limited partnership (LP) interest in the exchange fund. It also avoids triggering a taxable event, deferring tax consequences.
While many exchange funds are dealing in publicly held stocks, the concept has yet to take hold in the private markets. Collective Liquidity is a pioneer exchange fund in the private, VC-backed market, providing shareholders of unicorn companies fast and easy access to the tools they need to manage their wealth, allowing them to diversify their positions and gain liquidity, when needed.
According to Collective Liquidity Co-Founder and CEO Greg Brogger, employees of unicorn companies often have stock options as part of their compensation packages, causing them to become over-concentrated in their employer’s stock, therefore being exposed to significant financial risk and volatility. After diversifying their holdings via an exchange, clients can access Collective Liquidity’s Exchange Loan issued by WebBank, where they borrow against their LP interest. This provides a fast and easy way to gain liquidity and can deliver more after-tax cash than a stock sale, where up to 50% of the value could be lost to taxes.
For example, an exchange of $1 million results in tax savings of $414,000. Putting this tax savings to work in an appreciating asset (i.e., the exchange fund) may result in up to three times more after-tax proceeds over a seven-year period. All the while, the client still benefits from upfront liquidity and diversification.
“What really powers the difference is tax savings,” Brogger says. “By investing that amount and having it compound over time, it produces a massively better result over multiple years than just selling the stock.”
The Exchange Loan also allows borrowers to retain the long-term upside of having a portfolio composed of leading pre-IPO companies. Furthermore, these loans are non-recourse to the borrower, meaning they never have to come out of pocket to repay them. In the event of non-repayment, the borrower’s LP interest can be redeemed to pay down the loan. Clients are able to immediately initiate exchanges from Collective’s website, and borrowers can receive their exchange loan funds as soon as three business days after the exchange is completed.
“Every investor knows that holding a single stock is risky, even if the company is well-known and growing fast, which is why financial advisors always preach diversification,” Brogger says. “Collective Liquidity enables our clients to diversify within the private market, with a portfolio of fast-growing, VC-backed companies that are looking for an exit in the next two to three years.”
All of the companies that are part of Collective Liquidity’s exchange fund undergo a stringent selection process. An investment committee of experienced venture capitalists targets only the strongest unicorns for eligibility for the fund. Collective then uses data from many of the major private secondary marketplaces to inform its proprietary algorithm to price the shares in the portfolio.
“At Collective Liquidity, we’re on a mission to free the wealth of unicorn shareholders so they can finally take control of their financial futures,” Brogger says. “Private market trading remains slow, uncertain, and expensive – we think our exchange fund and exchange loans offer employees a better solution. We believe it makes for a more efficient venture economy to nurture the innovators and companies making our lives better every day.”
IMPORTANT DISCLOSURES
This information is confidential. Collective Liquidity, Inc. and Collective Liquidity Asset Management, LLC and its affiliates (collectively called “Collective Liquidity”) care about protecting their proprietary information, confidential material, and trade secrets. The information contained herein relating to the Collective Exchange Fund, L.P. (the “Fund”) is not final, is subject to change, and has been prepared solely for informational purposes. It does not constitute an offer to buy or sell an interest in the Fund or the provision of any investment management or advisory services.
Nothing contained herein constitutes investment, legal, tax, or other advice, nor is it to be relied on in making an investment or other decision. All loans issued by WebBank, Member FDIC. Interests in the Fund are not FDIC-insured and may lose value.
See here for more Important Disclosures.
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