Collective Exchange Fund Overview

Name

Collective Exchange Fund

Manager

Collective Asset Management

FUND PURPOSE

To provide tax advantaged diversification and liquidity to persons holding equity securities of late-stage, venture-backed, private growth companies with significant unrealized capital gains.

Investment Objective

Principally to provide investors with long term exposure to the equity securities of late-stage, venture-backed, private growth companies.

Investment Strategy

Passive investment approach to construction of a diversified basket of unicorn equities acquired through in-kind contributions and cash purchases

Target Returns

Representative of the late-stage, private growth asset category

Reporting

Gross NAV published daily, net NAV published monthly

Liquidity

Quarterly redemptions for cash subject to gate and holding periods

Eligible Investors

Accredited investors and Qualified Purchasers

Legal Structure

Limited partnership; perpetual, private 3(c)(1) fund

Management Fee

1.75% p.a.

Carried Interest

15% subject to “high water mark”

Fund Administrator

SS&C

Auditors

KPMG


Growth of Unicorn Asset Category

Over the past ten years, the average time to IPO for a venture-backed, private growth company has increased and many of the most successful venture-backed, private growth companies have remained private. In 1999 a start-up's average time to IPO was 5 years; but by 2020 the average time was 12.5 years. As a result, significant value creation has accrued to private market investors:

Private Growth Drives Outperformance vs Public Market
Private Growth Drives Outperformance vs Public Market

More than 1,000 unicorns (private companies with valuations in excess of $1 billion) have been created, with an aggregate market cap in excess of $3 trillion.

Growth in aggregate market cap of unicorns
Growth in aggregate market cap of unicorns

The Collective Exchange Fund

The Collective Exchange Fund is principally exposed to a portfolio of unicorn stocks diversified across technology sectors. The Fund enables shareholders and employees of selected unicorn companies to diversify out of over concentrated positions in a single stock by exchanging their shares, tax-deferred, for a limited partnership interest of equal value in the Collective Exchange Fund.

Apart from its investment in the unicorn portfolio, the Exchange Fund also invests in real estate in order to preserve the tax deferred treatment of exchanges into the Fund under U.S. tax law.

Typically, after a one-year holding period, Exchange Fund LP interests can be redeemed quarterly for cash at NAV subject to a gate. Or, for more immediate liquidity, limited partners can borrow tax-free against their LP interest on a non-recourse basis.


Investment Strategy & Implementation

Investable Universe

The Collective Exchange Fund uses a passive management approach to provide efficient exposure to private growth asset category and manage risk through diversification.

The Collective Investment Committee’s target portfolio selection process includes both quantitative and qualitative criteria including:

  • Private growth companies that have closed a primary financing with an enterprise value of at least $1 billion
  • The financing must have included at least one venture capital firm recognized by Collective's Investment Committee
  • The financing must have raised at least $100 million in equity capital or $200 million from prior financings.
  • Initially, the company must be domiciled in the United States

In addition, the Collective Investment Committee considers other factors such as the company’s leverage and other financial characteristics, customer concentration risk, quality of the available data and receptivity to shareholder liquidity.

In order to comply with U.S. tax laws for tax-deferred exchanges, the Exchange Fund must hold “Qualifying Assets” equal to twenty percent or more of its gross assets. The Exchange Fund satisfies this requirement by holding private real estate partnership interests. These partnership interests are selected for their expected stability in value. Generally, the partnerships will hold real estate diversified by segment (e.g., commercial, multi-family, industrial, etc.) and geography.

The Universe: Late Stage, Venture Backed, Private Growth
The Universe: Late Stage, Venture Backed, Private Growth

Portfolio Exposure

The Collective Exchange Fund seeks to acquire a portfolio of 100 leading private growth companies. The Fund will target a portfolio diversified across technology sectors and, within these sectors, across individual companies. Generally, the fund will hold no more than twenty percent of its assets in any one technology sector and no company will represent more than five percent of fund assets. As described below, the Collective Exchange Fund will also hold twenty percent or more of its assets in the form of real estate partnerships.

The Collective Exchange Fund
The Collective Exchange Fund

(*) Actual asset allocations will vary from time to time. Note also that the Fund will hold material amounts of cash to fund purchases of securities and real estate limited partnership interests, redemptions by limited partners and for other purposes.

Portfolio Management

Utilizing a supervised, algorithm driven approach, the Collective Exchange Fund is systematically rebalanced on a rolling basis to meet liquidity, diversification and risk targets. The valuation and investment process are overseen by the Collective Liquidity Investment Committee.

Diversified Exposure to Growth Sectors
Diversified Exposure to Growth Sectors

Valuation and Allocation Algorithm

The Collective Liquidity Private Market Algorithm values unicorn shares and allocates capital across the target portfolio for the purpose of:

  • Pricing fund exchanges and purchases
  • Establishing loan-to-value ratios
  • Identifying net asset values
  • Valuing limited partnership interests for quarterly redemptions

The algorithm is designed to produce valuations representative of the market price at a point in time (as opposed to determining the company’s intrinsic or future value based on fundamental analysis). This is accomplished primarily by:

  • Analyzing private market pricing signals (e.g., financing valuations, secondary market trading prices, etc.) along with other company data to produce an enterprise value
  • Weighting those enterprise values based on the signal’s quality and recency and integrating them into a single enterprise value
  • Applying a waterfall to the enterprise values to set per share prices for each share class.

Collective's Private Market Algorithm also dynamically allocates capital and exchange eligibility to meet the Fund's diversification objectives and to rebalance the portfolio on a rolling basis. The algorithm’s capital allocation is also influenced by the quality of the data used in the valuation process - the higher the data quality for a portfolio company, the more capital the algorithm will allocate to the company.


Tax Deferred Exchanges

Exchange funds like the Collective Exchange Fund were created in 1953 to enable investors to diversify away from over concentrated, highly appreciated stock holdings and reduce their risk without triggering taxes. Exchange funds holding publicly traded securities are well established and hold significant assets estimated to be in excess of $100 billion .

As a general rule, so long as twenty percent or more of the Exchange Fund's gross assets are held in “Qualifying Assets,” exchanges of unicorn shares into the fund for a limited partnership interest of equal value are not treated as taxable events. The fund intends to purchase equity interests in real estate funds (see description above) that meet this Qualifying Assets requirement such that, at all times, exchanges into the fund do not trigger tax obligation to the exchangers.


Redemption

To provide its limited partners with liquidity, the Collective Exchange Fund permits redemptions of limited partnership interests at the end of each quarter. After a one-year hold, a limited partner may typically submit a redemption request for some or all of their interest in the Fund. Fund interests are redeemed for cash at a purchase price implied by the fund’s Net Asset Value at the end of the quarter. The fund’s redemption obligations in any given quarter are limited to four percent of the fund’s Net Asset Value. Redemptions made in connection with the repayment of Exchange Loans are not subject to a gate.


Disclosures

The Fund has not commenced operations. The information contained herein relating to the Fund is not final and is subject to change. The information on this website is not an offer to sell or a solicitation of an offer to buy an interest in the Fund or the provision of any investment management or advisory services.

The Fund’s limited partnership interest will not be registered with the Securities Exchange Commission or other regulatory authority. Investors will be required to verify their status as an “Accredited Investor” to participate in any offering of the Fund’s limited partnership interests. No securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through Collective.

Prospective investors should consider the investment objectives, risks, fees and expenses of the Fund carefully before investing in the Fund. This and other important information are contained in the Fund’s Confidential Private Placement Memorandum, which when available can be obtained by contacting Collective.

Investment in the Fund involves substantial risk. The Fund intends to primarily invest in securities of private, late-stage, venture-backed growth companies. There are significant potential risks relating to investing in such securities. The Fund is not suitable for investors who cannot bear the risk of loss of all or part of their investment. The Fund is appropriate only for investors who can tolerate a high degree of risk and do not require a liquid investment. The Fund has no history of public trading and investors should not expect to sell limited partnership interests in the Fund. No secondary market exists for the Fund’s limited partnership interests, and none is expected to develop. This is not a complete enumeration of the Fund’s risks. Please read the Fund’s Confidential Private Placement Memorandum for other risk factors related to the Fund.

Collective does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.

The information contained herein is for informational purposes only. This material contains the current opinions of Collective and such opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.