Private markets may offer something different and complementary to publicly listed companies. Christian Munafo, CIO of Liberty Street Advisors, says companies are staying privately owned for longer and outlines some of the opportunities for growth in these assets.
Access to private markets has traditionally been the domain of institutional investors through often high minimum, complex and paperwork-laden private placement vehicles. The democratisation of private market opportunities is a core mission for us; we want to open the doors to privately owned, late-stage, high growth innovation companies to as wide a range of investors as we can.
Private market assets are increasingly important. Private companies today stay private for on average three times longer, while the pool of public stocks available has declined over the past two decades. The investable number of these companies, often referred to as pre-IPO companies, has surged to unprecedented levels. In our view, this is primarily because many private companies have decided they do not want to go public early in their lives, for a variety of reasons, ranging from the administrative burden and the costs of being public to the adaptability staying private offers, especially for high growth companies that are rapidly evolving their business models. Many of these companies likely prefer not to be restricted or held back, possibly by the demands of quarterly earnings. It is that category of high growth, later stage companies that we tend to focus on.
A bigger pool and more targets
Additionally, the volume of capital that has been targeted at late-stage venture-backed companies in the private market has risen dramatically in the same timeframe1. We estimate that the pool has risen by over USD 1 trillion in the US alone. If one looks back to the 1980s and 1990s, a typical private market high growth technology company would go public roughly four years from its inception, so the Microsofts of this world, the Amazons, the Oracles, and others would see most of their dramatic market value appreciation occur in the public arena.
But today, those four years from inception to public market status have tripled to 12 years, and based on the data available, the average market caps for these companies have increased by nearly 800% while they mature in the private market2. In fact, the number of private companies with market caps in excess of USD 1 billion, commonly referred to as unicorns, has soared from just one back in 2010 to more than 900 at present globally3, of which roughly half reside in the US. Moreover, many of these companies never list on public exchanges, but rather get acquired4. Unless investors have access to private market strategies, in our view, they are missing out on a potential capital appreciation opportunity.
Small to medium cap exposures
The average market cap of the companies we curate are valued in the single-digit billions, in other words a proxy to what traditionally would have been small to medium cap in public markets. The themes these tend to centre on are technology, innovation and disruption, across North America, Europe and some highly developed Asian markets such as Singapore.
The companies we look at range from the space economy to cybersecurity to education technology, transportation technology, healthcare, genomics, agricultural technology and food technology. We are not, however, focused on start-up stages; we are typically not interested in taking on that early-stage risk. Rather, the typical company that attracts us has at least USD 50 million in revenue and often hundreds of millions, in some cases billions. We have many key determining factors for the selection process, but in broad terms, we need to see very strong long-term value metrics in these businesses; companies that are going after large markets, and businesses with differentiated offerings and diversified customer bases.
Our target investments are often two to four years from an exit event such as a listing or a takeover; the latter historically accounts for roughly two thirds of all such private market exits. Our data shows5 that in the US, the private market investor who came in at the last round phase can often outperform investors who waited to access those companies once they became public, although at the same time they may have to navigate more turbulent waters, in our view. Moreover, we believe many of those companies never actually go public, so in many cases public market investors would likely never gain access to these companies.
2Source: The Private Shares Fund; Initial Public Offerings: Updated Statistics, Jay R. Ritter, Cordell Professor of Finance, University of Florida, August 25, 2021.
3Source: Liberty Street Advisors as at 30 November 2021.
4Source: The Private Shares Fund; Initial Public Offerings: Updated Statistics, Jay R. Ritter, Cordell Professor of Finance, University of Florida, August 25, 2021. There is no assurance that any private company will achieve the exit stage either through an IPO, M&A, or other means.
5Source: The Private Shares Fund, Pitchbook, Y-Charts, Nasdaq, SEC Edgar. Total 608 US Venture-Capital-Back Private Companies that executed an IPO from 1 January 2010 to 30 September 2021. Last private financing prices adjusted for subsequent stock splits to allow for appropriate comparisons. Only includes formerly VC-backed, US companies listing on the NYSE or NASDAQ. Analysis tracks the change in price for an individual share at last private financing, and therefore does not factor in potential tax implications or management and performance fees that may be associated with investments in private markets.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.