In recent years, we have seen a shift of capital from public to private markets. Liberty Street Advisors’ Kevin Moss discusses the reasons for this shift, as well as the diversification benefits investing in longer-term, private asset investment strategies can offer.
When the Liberty Street Advisors investment team set out to access late-stage venture capital back in 2012, we immediately noticed that companies were staying private for longer. Apple went public when it was five years old; this was necessary for it to continue to raise capital to finance its growth. Today, companies with similar profiles are staying private for on average 12 years, or in some cases 15 to 20 years.1 Why is this happening and what are the benefits to companies of staying private for longer?
The regulatory environment has made it easier for private companies to stay private longer. At the same time, it can be quite burdensome and expensive for private companies when they are entering the public market. Many of the companies staying private for longer are later stage high-growth technology and innovation companies. These companies’ management teams are often focused on high growth and may not want to be held accountable to the public market or quarterly earnings and the volatility in the share price this can cause. For this reason, we see a lot of companies opting to remain private until they have matured and optimised various aspects of their business models, after which they can focus on quarterly earnings. This means that investors in private companies have access to that growth phase that formerly occurred in the public domain.
Crucially, staying private for longer is possible for companies today because of the amount of capital that has become available in private markets, which has skyrocketed. In 2021, more than USD 300 billion was committed to the venture asset class, of which USD 230 billion was earmarked solely for later stage companies. Over the last decade alone, well over USD 1 trillion of capital has been allocated to these companies.2
Diversification from public markets
As with public markets, timing the entry into private markets is extremely difficult; no-one could have foreseen a global pandemic, nor could anyone predict the timing of geopolitical events or other crises, such as the outbreak of the war in Ukraine. Further, no-one would have known coming into 2022 that technology-heavy public markets would be down 15% to 25% year-to-date or that we would see the type of rotation that has occurred in high growth companies. What we can state with far more conviction is that an allocation to private assets has the potential to offer diversification from a number of these exposures.
In periods of uncertainty, significant drawdowns in public markets occur, often caused by institutional selling, short selling, analysts producing unfavourable research on companies and many other forces that can drive prices, all of which are beyond a private investor’s control. Holding private assets can offer more stability compared to the day-to-day movements in public securities, as well as low correlation to public markets.
Having said that, in periods of financial distress, opportunities related to price dislocations also arise in private markets which, if one has the capital to deploy, can be beneficial. There are some companies we looked at last year which we thought were attractive, but their valuations were too high, in our view. Six months later, the world has changed, prices have weakened, and we are deploying capital more actively into those opportunities.
In short, we believe it is a very interesting time to be investing in private assets. This is not only because this is becoming increasingly necessary in order to access the growth phase that formerly occurred in the public domain, but also because of the diversification benefits private markets can offer and the specific opportunities we see to invest in attractive companies at lower valuations.
2Source: Pitchbook Venture Monitor Report Q1 2022
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