Over the last two decades, the number of companies listed on public markets has roughly halved. Liberty Street Advisors’ Christian Munafo examines why companies today are staying private for longer and outlines the opportunity this presents for investors.
Two decades ago, the average age at which a company listed was four years. Apple is a prime example of this, listing with revenues of around USD 150 million roughly four years after its inception. By 2022, the average age of a company when it listed had risen to between 10 and 15 years and the average market cap grew by several hundred percent. This shift has also led to an increase in the number of so-called unicorns – privately held start-ups valued at more than USD 1 billion – as these companies demonstrate more significant operating metrics, though it should be noted that in certain cases this is in part attributable to froth and overexuberance in the market.
There are a number of reasons for this shift towards staying private for longer. Regulatory changes have increased the administrative burden and costs associated with being a public company. Often, companies also do not want to be held accountable for publishing their earnings on a quarterly basis or be held hostage to public market volatility. Currently, more than 70% of those companies generating USD 100 million or more in revenue are private. Indeed, this number is potentially even higher given most private companies are not required to disclose their financials. The implication for investors is that those who are not invested in these companies when they are private could be missing out on the opportunity for substantial capital appreciation.
Increased global demand
In the years following the 2008 Global Financial Crisis (GFC) we saw the volume of capital raised for investing in private markets rise dramatically. Looking solely at US venture-backed companies, over the last decade or so, roughly USD 1.5 trillion has been made available, supporting the trend of companies staying private for longer1. We also saw an increase in ‘tourist’ investors driving demand by buying into private markets, leading to high valuations.
Searching for the best opportunities
In 2022, however, valuations began to return to more realistic levels, creating private market opportunities that we think are hard to ignore. We are keenly aware of the ongoing macroeconomic challenges, but we believe some of the best times to deploy capital are periods of volatility and uncertainty. We would never recommend that investors try to time any asset class, least of all private markets, which requires a long-term perspective, but last year many of the opportunities we saw came in the secondary market where we observed deeply dislocated pricing in high quality companies that had strong balance sheets. Historically, investments made during periods of increased dislocation have generated strong performance in subsequent years.
The companies that we are focused on – late-stage venture capital (VC), which sits between VC and traditional private equity – are often already successful with established market share, strong management boards and proven products. Many of these companies are akin to traditional small- and mid-cap growth companies, but they are not available in public markets today to the same extent that they once were for the reasons we have described above. Increasingly, we believe private markets are the only way to gain access to some of the most innovative and technology-driven sectors, including fintech, artificial intelligence, cybersecurity, cloud, data storage and analytics, online education, supply chain optimisation, e-commerce, digital health, and the space economy, and that they can offer investors attractive risk-adjusted returns with potentially lower volatility than public equities.
With that said, we are definitely seeing a bifurcation across the market whereby high calibre companies continue to raise capital largely without much trouble and generally at higher valuations. It is lower calibre companies, or those that are capital constrained, that we believe are at the highest risk. We expect this bifurcation to continue. Selectivity and an experienced management team thereby remain vital in order to navigate the current environment and to identify the best opportunities in the late-stage venture capital space.
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