With a new type of '40 Act fund structure, a Midwestern startup's chief is making a push for both direct retail investors and RIAs. Watch for him and his team to bring their new structure to other platforms in the coming year or so.

William L. "Will" Zell Zell Capital Founder, CEO

"Right now, it's going to be direct," Will Zell, founder and CEO of Columbus, Ohio-based Zell Capital, tells MFWire. "We aspire and will work toward getting on some of those larger custody platforms. Our goal is to kind of begin some of those conversations."

Zell predicts that it will take one to two years to get the firm's new fund structure onto the big custody platforms. And he's open to helping other asset managers use the structure, too.

On June 8, Zell Capital launched their initial fund in a new structure, which Zell calls "Access Funds" (in contrast with other fund structures, like mutual funds, ETFs, venture capital funds, private equity funds, interval funds, or traditional closed end funds). U.S. Bank Global Fund Services is Zell Capital's back-office partner (both custodian and transfer agent), while Eversheds Sutherland provides legal counsel and KPMG LLP is the fund's independent accounting firm.

Access funds, Zell explains, are a way to make venture capital investing to all U.S. investors, not just institutions and people with high income or net worth. Like open-end mutual funds, most ETFs, interval funds, and closed-end funds, an access fund is registered with the SEC under the '40 Act.

"It's an internally managed, non-traded, closed-end investment company," Zell says.

The structure's differences, akin to some of the characteristics of traditional venture capital funds, are designed around the fact that venture capital investments are meant to not be short-term. Unlike open-end funds (which can be purchased daily unless hard- or soft-closed), ETFs (for which market makers can create and destroy shares in real-time each market day), and traditional closed-end funds (which have IPOs like stocks), Zell Capital's access fund includes an initial offering period which lasts either 18 months (i.e. December 2022) or until the fund reaches $25 million in AUM, whichever comes first. (They'll close the fund to new investments if it reaches $50 million, Zell says.) Investors pay a fixed price of $20 per share, unless the NAV surpasses that in the offering period. And the access fund will, like traditional VC funds, invest in different early stage startups, all while making regular public disclosures like other '40 Act funds.

NAV calculation (unlike ETFs, which price in real-time each market day, or traditional open- and closed-end funds, which price daily) is monthly. Zell says they generally won't change the valuation of their underlying startup investments in between new rounds except for "significant events."

"It drives to the fundamental way that you think about making money in venture capital. You're not thinking about making money by buying shares in a fund and then selling those shares later at a higher price," Zell says. The idea in VC (and with an access fund), he explains, is to wait until the fund realizes gains from its startup investments.

"With venture capital today, people invest a small percentage of their portfolio," Zell says. "There's no reason a non-accredited investor shouldn't be able to: one, educate themselves on the asset class; and then two, think about allocating a small percentage."

Zell traces the origin of access funds back to 2014, when he read up on business development companies (BDCs), which he describes as being based on a slogan about "making private equity public." A few years later, as he started to pursue his idea about bringing venture capital investing to the masses, he started out looking at the BDC structure. Yet as he talked features with Eversheds Sutherland's Steve Boehm, Zell decided to go with a new structure instead.

"The fundamental intent of this structure is to provide access to the 87 percent of households in the United States that effectively have no access to private market strategies," Zell says.

There's kind of two customer audiences. One is the end retail investor. We'll be utilizing modern digital strategies to promote the fund. Second, there will be the investment advisor community.

Advisors have clients across a "spectrum of wealth," Zell says, and an access fund will be something they can use across their entire client base, not just the wealthiest clients and institutions. That means RIAs will be able to incorporate venture capital into their investment strategy for all of their clients.

"The experience I want to ultimately make for investment advisors ... [is that] they can go about allocating client capital into this just like any other investment they'd recommend," Zell says.

Zell is executive chairman and co-founder (and former president and CEO) of Nikola Labs, and founder of Providence Holdings and LFH Properties and Investments, LLC. He also founded Huddlwoo and ConnectToHome. 

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