How to Hold Pre-IPO Anthropic and OpenAI Shares [Weekend Money]

ETFs for Pre-IPO Share Exposure

Consider Closed-End Funds as Well

As artificial intelligence (AI) companies Anthropic and OpenAI prepare for stock market listings, investment products incorporating pre-IPO shares of these firms are drawing attention from investors seeking to benefit from the IPO events.

Jang Chi-young, a research analyst at Hana Securities, stated, "Once the details of the IPO are clarified, investors can either invest in listed companies holding pre-IPO shares or utilize exchange-traded funds (ETFs) and closed-end funds that directly incorporate unlisted shares." Both product types are listed on exchanges and can be traded in the same manner as regular stocks.

Easy Access via ETFs... Note Potential Dilution and Delayed Reflection of Value

According to Jang, ETFs incorporating pre-IPO shares provide a straightforward way to hold unlisted stocks. Under U.S. Securities and Exchange Commission (SEC) regulations, the total allocation of unlisted shares within an ETF is limited to 15%. While the current allocations of Anthropic and OpenAI in ETFs are low, Jang explained that these could increase if the companies' valuations are reassessed in the future. For those who want exposure to these companies before their IPOs via ETFs, Jang recommends focusing on CNEQ and ALAI, which have higher allocations to Anthropic, and TTEQ, which includes both Anthropic and OpenAI.

CNEQ is an ETF that primarily invests in large-cap U.S. growth stocks. It maintains a portfolio of 30 or fewer constituents, with the top five holdings accounting for about 40% of the portfolio: Nvidia (13.3%), Microsoft (6.1%), TSMC (5.8%), Alphabet (5.7%), and Anthropic (5.5%). ALAI includes a 3.02% allocation to Anthropic and broadly invests in companies developing or utilizing AI technologies. With approximately 70 holdings, it offers greater diversification compared to CNEQ. TTEQ includes both Anthropic (0.9%) and OpenAI (0.47%). Although the portion of unlisted stocks is limited, nine out of the top ten holdings are semiconductor-related companies, which Jang notes are well-positioned to benefit from the expansion of AI infrastructure investments.

However, there are two factors investors should keep in mind when using ETFs. First, if there is a surge in capital inflows, dilution of holdings may occur. Because unlisted stocks are less liquid, it is difficult to increase allocations in line with the pace of inflows. For example, in May, as capital inflows accelerated, NASA's allocation to SpaceX fell from 10.7% to 4.6%.

Second, the net asset value (NAV), which serves as the base price for ETFs, may be slow to reflect changes in the value of unlisted stocks. ETFs typically use special purpose vehicles (SPVs) or similar structures for indirect ownership of unlisted shares. Since these shares are not traded on exchanges, their values are determined by SPV or fund manager assessments. As a result, even if an unlisted company is revalued, there may be a lag before this is reflected in the NAV. In the case of XOVR, which had a 10% allocation to SpaceX, NAV performance remained similar to the underlying index (which does not include unlisted stocks), even during periods when the valuation of SpaceX increased more than fourfold, resulting in only limited outperformance versus the benchmark, according to Jang.

Closed-End Funds Without Pre-IPO Share Allocation Limits—Be Wary of Price Distortion Risks

Closed-end funds listed on exchanges also offer a way to gain pre-IPO share exposure. In particular, since there are no restrictions on the allocation of unlisted shares, these funds can be used by those seeking greater exposure to unlisted companies. Currently, the combined allocations to Anthropic and OpenAI are 23.9% for DXYZ and 28.9% for VCX, respectively. Because the number of shares outstanding is fixed, these funds are relatively less affected by dilution from capital inflows.

However, there is a risk of market price distortion. If market demand increases, the trading price may command a premium over NAV. Conversely, if alternative investment options become available and demand decreases, the fund may trade at a discount. Jang advises, "Investors should check the magnitude of any market price premium over NAV at the time of purchase."

This content was produced with the assistance of AI translation services.