Definition

Exchange Fund (Private Market)

A pooled investment fund into which shareholders contribute concentrated stock positions in exchange for LP (limited partner) interests representing a proportional share of the diversified pool - without triggering a taxable sale. Exchange funds have existed in public markets for decades (Eaton Vance manages over $500 billion in exchange fund assets), allowing public company executives to diversify concentrated positions tax-free. Collective Liquidity is the first exchange fund to accept private company shares, requiring significant legal and tax structuring to enable the mechanism in the illiquid private market. The key tax advantage: a contribution to an exchange fund is not a sale, so no capital gains tax is owed at the time of exchange. The tax is deferred until the LP interest itself is eventually sold, and the deferred tax compounds over the holding period - generating approximately 2x the after-tax wealth over seven years compared to selling shares immediately and reinvesting after taxes.

From the episode “Turn Illiquid Equity Into Real Wealth”

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Turn Illiquid Equity Into Real Wealth

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