By Erik Jensen, Client Advisor
On the surface, the ongoing artificial intelligence boom came out of nowhere. As with all things, though, that depends on your perspective.
Technically, AI is not a new phenomenon. Google is a form of AI, and it’s been around for over 25 years. Chatbots, which have been used for a decade, are almost quaint. But the recent launch of consumer-friendly interfaces like ChatGPT and Google Gemini seemed to change everything, unleashing a torrent of speculation about what AI is capable of.
Today, there’s no escaping AI. It influences what we write, it tells us the weather, what to watch, and where to travel. AI has permeated nearly every aspect of our lives — including how we invest. The extraordinary performance of companies that focus on AI, the “Magnificent Seven,” and other tech companies over the last year or so has created well-deserved excitement around AI. Investors increasingly want to participate in this excitement and get behind the companies making headlines, but jumping into the field takes a bit more nuance and can require a well-sourced, well-connected investment partner.
Investing in AI: Public vs. Private
Like many rapidly evolving industries, investors are presented with a choice to invest in the companies on the frontlines of innovation or in the companies supplying the AI industry. Unsurprisingly, the early AI winners gaining attention have been the giant tech behemoths. Google, Microsoft, and Meta have all invested billions into ramping up their AI capabilities. Meanwhile, Nvidia, perhaps AI’s biggest beneficiary to date, produces the chips that power the technology. The landscape of AI is vast, with investment opportunities available across the entire stack, including data storage and management, compute resources, data processing, machine learning, cloud, and infrastructure, to name a few.
Evaluating which part of the AI stack to invest in is a daunting task and further complicated when faced with whether to pursue these investments in the public markets or through the private markets.
Public markets allow access to already established companies (Google, Microsoft, Meta, Nvidia) that use and integrate AI across their vast and diversified product offerings. These headline-name public-market companies will undoubtedly be essential contributors to the AI revolution, but given their size, AI is likely only one piece of their overall growth story.
True innovation and yet-to-be-discovered breakthroughs from AI will likely happen in the private markets. Publicly traded companies recognize this, evidenced by the growing number of investments, partnerships, and acquisitions between the two. A perfect example is Microsoft’s $13 billion partnership with ChatGPT-developer OpenAI. Anyone can pick up a few shares of a publicly traded company, but remember that these AI-enabled organizations are at least one layer removed from the truly transformational AI innovations.
Investors who want to connect directly with companies on the brink of developing next-generation AI — companies such as OpenAI, Anthropic, Mistral, etc. — must go through the private markets, which can be harder to navigate.
Before the proliferation of financial technology and the tremendous access to information we enjoy today, talented investors could outperform the broader markets. This outperformance (investing in the right company) could be achieved through an information advantage, a timing advantage, or a skill advantage. In today’s world, many of these advantages have been erased in the public markets. However, these advantages still exist in the private markets, and the money, resources, and development behind AI are ripe for skilled investors in the private markets to take advantage of.
Coveted Access & Diversification
Private markets have grown from a $1 trillion industry to a $17 trillion industry over the past 20 years. Navigating this area can entail taking on more financial commitment and risk. It is critical to team up with a seasoned private investment firm that has a varied portfolio of investments and a solid due diligence process.
The dispersion of returns between the top-performing and middle-of-the-road private managers is staggering. Getting access to the right private market opportunity is critical, and those opportunities are not readily available to everyone. At Caprock, our top-tier investment platform offers the families we work with the opportunity to invest in the technology that AI is creating. This access is the result of years of forging relationships with some of the world’s top-performing venture capital and private equity firms. These relationships not only provide our clients access to exciting investment opportunities, but also at significantly reduced minimum investment sizes, investor friendly negotiated terms, and professional due diligence and reporting.
Maintaining investment discipline in the face of such exciting potential will prove critical, and diversification will be vital in protecting the capital that our clients have worked so hard to build. As recently shared in an article by Chris Schelling, The Dangerous Democratization of Alternatives, access, manager selection, and professional due diligence and monitoring influence long-term returns a great deal.
Caprock has been investing in private markets since 2005 and has $4.7 billion invested across more than 200 funds. Our investing platform allows families to invest in a variety of private AI companies through several funds, co-investments, and direct placements that have been thoroughly vetted by our seasoned investment team. Clients rely on our team to negotiate terms, conduct extensive due diligence, and provide real-time performance reporting.
The AI revolution is happening. Caprock is helping ultra-high-net-worth clients make the most of it.
About the Author
Erik Jensen is a CERTIFIED FINANCIAL PLANNER™ and financial advisor for Caprock. Since 2010, he has worked with high-net-worth families to plan, manage, and invest their capital in accordance with their aspirations. Erik builds strong relationships with the clients he serves not only to act as their financial guide, but also to assist them in navigating the non-investment elements of their lives. He believes that educating and empowering clients will help them feel more engaged to their assets.
©2024 Caprock. All rights reserved. The Caprock Group, LLC (“Caprock”) is an SEC Registered Investment Advisor. This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but Caprock makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. Registration with the SEC does not imply a certain level of skill or training.
