Public Entrance into the Private Equity Market

A “publicly traded startup” may sound like an oxymoron, but it’s not.

It’s is a simple way for anyone — you included — to invest in some of the most promising early-stage companies on the planet.

You can do it from your brokerage account…

Or through your IRA or 401(k).

How?

Simple: Buy a type of stock known as a business development company.

A “publicly traded startup” may sound like an oxymoron, but it’s not.

Essentially, business development companies (or “BDCs”) are publicly traded private equity funds.

They invest passively in other businesses. And they distribute 90%-plus of their profits to shareholders.

Think of it like a mutual fund or a REIT. Except BDCs don’t invest in public stocks or real estate. Instead, they invest in private businesses.

There are three main types of BDCs.

Value Focused: These BDCs generally invest in mature companies with long-term operating histories. Investments are considered lower-risk and lower-reward.

Income Focused: Some BDCs invest in companies in order to generate income. Again, this is generally for more mature businesses that are throwing off cash and profits and can therefore pay special dividends to the BDC.

Growth Focused: Growth BDCs will invest in more speculative opportunities.

But recently, a new type of growth BDC has emerged. It invests in high-growth startup companies.

The largest and most widely followed is GSV Capital Corp. (NASDAQ: GSVC).

GSV was an early shareholder in some of the most profitable startup investments of the last few years.

They were an early backer of dozens of companies, including Facebook and Twitter.

And GSV’s investors benefited handsomely from their foresight.

From November 2012 through October 2013, GSV’s shares rose 112%.

Of course, not everybody who invested in GSV bought at the absolute bottom and sold at the absolute top.

The real secret to making these types of returns from BDCs is knowing when to invest in one.

You’ll want to think about investing in a BDC after its stock price has dropped. This generally happens when one of the BDC’s portfolio companies falls out of favor with the market.

For example, in late 2012, GSV’s stock price dropped by 60%. This was primarily due to Facebook — one of GSV’s holdings — having lackluster post-IPO performance.

Since the majority of companies in a BDC’s portfolio are private, it’s difficult for Wall Street to determine the “real value” of its assets. Therefore, when negative news hits, you tend to see a “baby out with the bathwater” type of situation, and the stock drops dramatically.

And this is precisely the time to consider buying.

For instance, even after Facebook’s stock stabilized and Twitter (another GSV holding) was on the verge of filing to go public, the stock still traded at less than half its peak price.

Investors who follow startup companies had known since June 2013 that Twitter was on the verge of an IPO. They also knew this would give GSV’s stock price a boost.

Those who purchased GSV shares in June and July watched the stock double within three months.

The jury is still out on whether GSV is currently a good investment. However, it’s worth noting that the stock has pulled back over the last few months, so it’s certainly something I’m keeping an eye on.

In addition to GSV Capital, investors can also look at Firsthand Technology Value Fund (NASDAQ: SVVC). It hasn’t performed as well as GSVC, but it’s less volatile.

I hope you enjoyed this series on how to create public market profits from private market insights.

Please keep your questions and feedback coming, and we’ll do everything we can to help you on your early-stage investing journey.

Happy investing!

Best regards,

Wayne Mulligan
for The Daily Reckoning

Ed. Note: Wayne’s advice offers a great way to double your money from little known groups of tech startups on public exchanges. And in today’s issue of Tomorrow in Review, readers were given a chance to discover one of the most incredible ways to do just that — including one form that could help them save as much as $18,000 on their taxes this year. It’s just one small benefit of being a subscriber to the FREE Tomorrow in Review email edition. Sign up for FREE, right here, and never miss another great opportunity like this.