An Allocation To Venture Capital Could Enhance The Returns Of Individual Retirement Accounts

Summary

Venture capital and retirement funds share long-term investment time horizons, making them ideal complements to one another. Individual Retirement Accounts (IRAs) are long-term investment vehicles, and venture capital aims to earn outsized returns over the long run.

For decades until recently, venture capital has catered primarily to endowments, universities, institutional investors, and high-net-worth investors. Most individual investors have had no choice but to seek exposure to innovative strategies in the public equity markets. Now, thanks to fintech platforms like Titan, individual investors can access venture capital for their retirement portfolios, diversifying beyond public equities and bonds.

Retirement Accounts And Venture Capital Are Built For Long Term Investing

Two common retirement accounts are the Traditional IRA and the Roth IRA, the former funded with pre-tax income and the latter with after-tax income. Both encourage long-term investing: if beneficiaries are younger than 59.5 years old, for example, the IRS penalizes redemptions by 10% and demands immediate payment of any income taxes due.[1] [2]

Venture capital funds typically invest in early-stage private companies developing exciting new products, services, or technologies that, in the short term, have little or no revenues and steep losses but, in the long term, have the potential for outsized returns.[3] Increasingly these days, they stay private for longer. One reason is that the regulatory burden associated with going public has increased over time—exacerbated by legislation like the Sarbanes-Oxley Act of 2002 —and has increased the expense and time to go public. Another reason is that the US tax code has favored private “carried interest”[4] [5] over public equity returns, so much so that venture capital firms, private equity firms, institutional investors, and secondary markets have been burgeoning.[6]

Accredited Investors Have Dominated The Demand For Venture Capital

Historically, only institutions and wealthy individuals have enjoyed direct access to venture capital: the SEC has limited access to venture capital funds to accredited investors with the financial resources to weather the risks—individuals or institutions that meet asset and/or income thresholds like net worth of $1 million and/or annual income of at least $200,000.[7]

A key risk associated with venture capital is illiquidity, which we believe is a feature, not a bug, for investors with a long-term investment time horizon. By committing capital to venture funds, investors are placing bets on the future success of early-stage companies that have the potential to deliver significant returns through liquidity events like initial public offerings or acquisitions. During the last 20-30 years, some endowments have capitalized on this opportunity:

• Harvard University’s endowment had allocated 36.7% of its assets to private equity as of June 2022.[8]
• Stanford University’s endowment allocated 32.3% to private equity investments as of August 2022.[9]
• The University of California (UC) system also has delivered significant venture capital returns, thanks to stakes in venture capital funds like Sequoia Capital.[10] Generally, 11.9% of the University of California’s investments are held in private equity.[11]

Such large institutions invest a portion of their overall portfolio because they can take on risk to potentially achieve higher returns. According to a study by Cambridge Associates, venture capital investments had an average annual return of 22.1% from 1990 to 2019, significantly outperforming the 9.9% annualized return of public equities.[12]

Now, Individual Investors Can Invest In Venture Capital

ARK believes that individual investors should be able to potentially benefit from the exposure to venture and other private funds that previously was limited to accredited investors in private equity and venture capital funds. To democratize venture capital, in partnership with Titan, the ARK Venture Fund is enabling investors to allocate a portion of their retirement and other savings to venture capital through an app. The ARK Venture Fund is an “Interval Fund” to which investors can contribute daily and redeem quarterly, subject to the Fund’s repurchase terms that limit the amount of outstanding shares that may be redeemed each quarter as described in the Fund’s prospectus.

Although venture capital is a high-risk investment, ARK believes that the potential for high returns over the long term may be suitable for retirement accounts diversifying beyond traditional stocks and bonds. With a minimum investment of $500 on the Titan app, individual investors can access opportunities in private equity for both traditional IRAs and Roth IRAs.

Since she founded ARK Invest, individual investors have asked Cathie Wood why regulators have blocked them from investing in startups that, while at high risk of failure, also have the potential to return 10 to 100 times their investment. In our experience, most investors who have expressed interest in investing in startups understand the risks associated with such investments.

ARK’s brand stands for an investment focus on disruptive innovation, radical transparency, and broad-based access to what we believe are the most promising investment opportunities—now from their earliest days with ARK’s Venture Fund.

Disclosures
It is important to keep in mind that venture capital is a high-risk, potentially high-reward investment strategy. While the potential for higher returns is there, there is also the risk that you could lose some or all your investment.

Investors should carefully consider the investment objectives and risks as well as charges and expenses of the ARK Venture Fund before investing. This and other information are contained in the ARK Venture Fund’s prospectus, which may be obtained by visiting www.ark-ventures.com. The prospectus should be read carefully before investing.

An investment in the ARK Venture Fund is subject to risks and you can lose money on your investment in the ARK Venture Fund. There can be no assurance that the ARK Venture Fund will achieve its investment objectives. The ARK Venture Fund’s portfolio is more volatile than broad market averages. The ARK Venture Fund also has specific risks, which are described below. More detailed information regarding these risks can be found in the ARK Venture Fund’s prospectus.

Please note that all app screens shown are for illustrative purposes only, meant to give a sample of what a user might expect to see in the Titan app. No data is representative of actual results. The ARK Venture Fund will be distributed to RIAs, family offices, high net worth individuals and institutional investors through other distribution channels, but is available to retail investors exclusively on Titan. Titan Global Capital Management USA LLC (“Titan”) is an investment adviser registered with the Securities and Exchange Commission (“SEC”).

ARK Investment Management has entered into an agreement with Titan, where it pays a fee to Titan for the ARK Venture Fund (the “Fund”) to be made available on its platform. In addition, Foreside Fund Services, LLC, the distributor of the Fund, pays Titan a portion of the distribution and services fee it receives from the Fund. ARK Investment Management, Foreside Fund Services, and Titan are unrelated parties.

Foreside Fund Services, LLC, distributor.

ARK Investment Management LLC (“ARK Invest”) is the investment adviser to the ARK Venture Fund.