Away from inflation and other volatility inducing headlines, there’s an interesting theme playing out between public and private markets.
On the heels of a record year for IPOs, the first quarter of 2022 is looking lacklustre.
The latest EY research shows UK companies raised just £397m in public markets versus £5.6bn over the same period last year. And it’s a similar story globally, with a Q1 seeing a 37% drop in the number of IPOs to and 51% drop in funding.
Turn the page to private markets though and you’ll need your sunglasses.
Chinese fast-fashion megatron Shein was recently valued at $100bn in its latest round of fundraising, putting its 2020 valuation of $20bn somewhat in the shade.
Pitting Shein’s $100bn valuation against fast-fashion giants such as Inditex at $66.7bn and H&M’s roughly $20bn valuation puts into context just how little growing companies need public capital to succeed.
The story is not a new one.
The short version is that companies are waiting longer before going public. Thanks to oceans of private equity cash in search of outsized returns, there’s no shortage of funding and in turn much less urgency for companies to go public.
According to research by the University of Florida, in 2021 the median age of tech companies at IPO was 12 years old, more than double the age seen in the dot-com era in early 2000s.
Historically, the main advantage of being public has been access to cheaper capital, debt and equity. After all, private equity investors (successful ones at least) tend to want to bank a lot of the upside from their investments.
But like all markets, private equity is bounded by the laws of supply and demand. With more players and fewer investment opportunities, private investors aren’t able to demand the supernormal returns on their investments they once could.
And this is good news for firms that want access to capital but might be nervous about the challenges of going public.
Take Stripe for example, now America’s most valuable private company and valued at $96bn, having completed its series H (or eighth round of funding).
Historically private companies have been out of reach for retail investors but that’s no longer the case.
There are now a few routes to market including funds, crowdfunding and SPACs. But funds and in particular investment trusts are generally the most liquid way to access these less liquid assets.
The way trusts are built means they are well equipped to straddle public and private markets.
As closed-ended funds, they don’t have to worry about investor withdrawals, as open-ended funds (such as mutual funds) do.
This means they can take long-term views on their investments. Or in the words of Scottish Mortgage, ‘somewhere between five years and forever’.
Investing in trusts comes with the added advantage of having professional teams choosing which private companies to back and of course ensuring there’s the necessary blend of public markets too. Some of the main players in the UK, including Scottish Mortgage and RIT Capital have private allocations of roughly 25% and 26% respectively.
For Scottish Mortgage, this approach enabled them to be early-stage investors in the likes of Tesla, Spotify and Alibaba. Current private companies include TikTok owner Bytedance and payments platform Stripe. For RIT, these include trucking fleet software firm KeepTruckin, crypto exchange Kraken and EdTech firm Age of Learning.
For many investors life in the public markets’ lane suits them just fine and that’s no bad thing. But with more value being created in the private world, for those happy with taking a bit more risk, the private markets could be worth a look.
This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.
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