Despite this year's volatility, U.S. Trust is getting ready to pitch a venture-capital fund to fat cats through its online broker parent,
U.S. Trust -- a private bank/money manager for millionaires -- filed preliminary paperwork for the
Excelsior Venture Partners Fund III
with regulators on Wednesday. The fund will primarily invest in private companies and venture-capital funds that invest in private companies. Though the filing's details are a bit fuzzy, it appears that the fund could offer its shares in December, closing the offering at year-end.
Several funds have been registered or launched this year that give Main St. investors access to venture capital or VC investing. Unlike those funds, though, this one is strictly for investors with a net worth of at least $500,000. The minimum investment in the fund, which will be sold through Charles Schwab, is $25,000 and an investor's investment in the fund cannot represent more than 10% of his or her net worth. The firm hopes to raise $200 million for the fund.
Those limitations might sound odd, but they make sense when you consider the risks involved. Beyond the risks of investing in young, often unstable start-ups, the fund's structure requires a pretty long-term commitment.
Unlike traditional open-end funds, which can only invest 15% of their assets in private companies, closed-end funds have a finite number of shares and don't have to cash out their investors shares at will. After selling their shares in the initial offering, closed-ends shares either trade on an exchange like a stock or they cash out their shares to a limited degree on set dates.
This fund won't do either. Since private companies don't trade on an exchange, it's not easy to cash them out. The fund can take up to 14 years to liquidate its holdings after it stops taking in money, so it doesn't really suit most investor's needs.
The fund also isn't cheap. While it is being offered without a load or sales charge, it's annual expenses are expected to be 2.05% and, like many VC or hedge funds, the adviser also gets 20% of the fund's profits.
U.S. Trust's managers do run other VC funds and the firm's investment pros are typically regarded as being top-shelf -- the average Joe can get access to their expertise through the Excelsior family of funds the firm offers.
But no manager's skill should make investor's overlook the extreme risk/reward proposition involved in VC investing. These "ground floor" investments can work out -- the average VC fund rose 146% last year according to Venture Economics -- but they can fall through the ground floor, too. The fund's filing lists private investments the same management team has made in other VC funds. The lists include many big winners like Lifeminders.com that eventually ended in a big IPO payday.
Of course, the filing also lists several investments that became worthless when these shops folded.