The future is private. Don’t wait for it.

The future is private. Don’t wait for it.
Big firms aren’t IPOing as quick as you think. Here’s why.
Dan Lane
Published
September 27, 2021
Updated
September 28, 2021

The ticker tape, the hugs, the handshakes and of course, the big IPO bell ringing at the heart of it all.

It’s a scene entrepreneurs the world over have at least thought about, if not set their sights firmly upon.

But, in recent years there has been a trend among companies to give up the listing day dream and stay private.

Even where companies do have ambitions to go public, they’re spending a lot longer in the pre-IPO stage than ever.

Why hold off on that IPO pop?


There are a few reasons why companies might just take a pause before thinking of coming to the stock market.

Chief among them is that public life comes with a whole host of reporting duties. If you stay private you’re under no obligation to report results and quarterly financial updates to the world. 

The advantage here isn’t just about saving yourself the annoyance of paperwork and PowerPoint presentations. It also stops company management from taking too much of a short-term view. 

Management teams with public share options tied to quarterly performance can lose sight of the bigger picture.


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Second, staying private means you can know who is actually on the shareholder register. Once you’re public, anyone can buy shares and build a stake in the company. 

That can mean finding out someone is amassing shares and is potentially in a position to fight for change in the firm through shareholder activism.

The third reason, and one a lot more relevant to firms over the past few years, is that often they simply don’t have to. There’s so much money in private equity these days that a lot of firms feel less pressure to raise money publicly. 


The Scrooge McDuck Private Equity Fund would have a field day in 2021.


Even mid-sized firms, who might have thought their only option was to come to the stock market, are increasingly able to find private backers instead.

According to Dealogic, by July this year private equity firms had announced 124 deals for UK companies. That’s taking into account outright takeovers and buying minority stakes.

The £41.5bn in combined deal value is the highest by this point in the year since Dealogic started tracking transactions in 2005.

With the UK market looking particularly cheap relative to global peers right now, it’s maybe not a surprise private equity is swooping in, aiming for a bargain they can spruce up and sell on in a few years.

But I want to own a piece of that company


There will always be firms happy to fund their own growth, thank you very much.

The likes of Mars or even Aldi have never made noises about going public. They’re seemingly content keeping it all in the Mars and Albrecht families.



But when there is a clear path from start-up to scale-up, to serious valuation, to IPO (like we see with a lot of tech firms), it can be frustrating for individual investors. The first chance they get to think about investing in them is when a lot of that value has already been created.

Private money boosted design platform Canva up from a valuation of $6bn in June 2020 to $40bn this month. All the while, public investors can do little more than look on with envy.



Crowdfunding is one way to access these opportunities but companies aren’t under any obligation to hold these rounds. They tend to be fairly irregular when they do, and private investors can get stuck with shares that aren’t easily traded.

But there are simpler ways to access pre-IPO opportunities if you know where to look. 

Listed funds with access to the private sphere give everyday investors the chance to buy into those growth stories and, as these funds’ and trusts’ shares are publicly-traded themselves, it’s a much more liquid way to do it.

Look at the likes of TikTok-owner ByteDance. It’s still not public much to a lot of investors’ chagrin. But it features in the Scottish Mortgage investment trust alongside private pals SpaceX, Stripe and Fortnite-owner Epic Games.

So, while some market watchers have been toe-tapping and looking at their watches in hope of a listing, others investing in the trust already have access to the private firms.


Pre-IPO firms aren’t off-limits


The latest story along these lines has to do with digital marketing group You & Mr Jones.

Rumours surfaced last week that the company, founded in 2015, is planning a $3bn listing in New York. 

If it goes ahead, it’ll be the first time most investors think about whether to buy its shares, or if a price tag of $3bn (more than double the firm’s Series B value of $1.3bn earlier this year) looks a bit expensive.

But if investors had bought into SMT or Merian’s Chrysalis investment trust they’d already have that exposure, as You & Mr Jones features in both.

There are similar conversations swirling around the likes of buy-now-pay-later firm Klarna, Starling Bank and even luxury travel firm Secret Escapes - all holdings in the Chrysalis portfolio.

RIT Capital Partners is another trust with a hefty weighting to private opportunities including trucking fleet software firm KeepTruckin, crypto exchange Kraken and EdTech firm Age of Learning. 

Trusts can be useful here because of their ability to straddle public and private markets. Their closed-ended structure (which means they don’t have to keep some money aside in case of investor withdrawals) allows them to take incredibly long-term views on their investments.

Where other types of funds might not feel comfortable funding companies with no definitive date they can get their money out, trusts see the chance to buy in for long-term growth. 

They’re also often the first port of call for pre-IPO firms looking for pockets big enough to take a chunk of shares in one go.

RIT Capital was initially set up to manage part of the Rothschild family’s fortune. They know a thing or two about the value of long-term thinking so it’s maybe not a huge surprise to see 28.9% of the £4.6bn portfolio in private investments, as of June 2021.


Lost in SPACs


Special purpose acquisition companies (SPACs) raise money from investors through a public listing and then set their sights on acquiring a private business. 

Over the past few years, they’ve been an incredibly popular route for companies hoping to avoid hefty IPO costs and bureaucracy. 

Acquired firms get to become a public company in the end but the risk for investors is that the initial investment goes into a cash shell which has to go out looking for a business to take public. It can feel odd to hand that cash over when there isn’t really a defined opportunity yet.

My colleague David Kimberley pointed out a few SPAC oddities in our Honey AMA here.


Private equity needs a makeover


The deals don’t stop at private-to-public transitions though. 

Private businesses can change hands and create value without ever coming to the stock market. But the firms and funds facilitating buyouts have given themselves a pretty terrible name over the years.

They’ve been known to ruthlessly strip assets from firms and either sell them on or cut short-term costs to the detriment of the long-term life of the business.

The annoying thing is this image of the sector still persists despite many private equity firms taking a much more pragmatic approach now. 

The industry doesn’t help itself a lot of the time with how opaque private deals can seem, as well as firms popping up out of nowhere to grab businesses and disappear again.

But investors can access this world through much more liquid vehicles like the BMO Private Equity trust, Harbourvest Global Private Equity, Belfast City Airport-owner 3i and even the iShares Listed Private Equity ETF.

It might be that you’re happy enough investing in public companies. Actually being able to delve into their accounts is a perfectly good reason to prefer them.

But it’s not the only way to invest, and investors have a lot more opportunity to access the private realm than they might think.

If more and more value is being created in the private world before companies even consider about coming to the stock market, surely it’s worth thinking about how you can be part of that value creation too.

Do you invest in private equity? Let us know your thoughts on the sector on the community forum:

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