September 3 , 2021

Commentary: Invest earlier, hold for longer

By Peter Singlehurst

A profound shift has occurred in capital markets. Companies are choosing to stay private for longer, meaning if they do decide to go public, it's at a later stage in their development. The average age of a tech company at initial public offering has doubled over the last 20 years and is now 11 years. Fewer and fewer entrepreneurs are seeing an initial public offering as the prestigious coming-of-age moment it once was.


Many exciting growth companies such as Space Exploration Technologies Corp. and Bytedance Ltd. remain privately owned despite being valued in the tens of billions of dollars. The opportunity is huge. At the end of 2020, 923 private companies were valued at over $500 million, with an aggregate value of $2.2 trillion — a similar size to the listed American small-cap and midcap market.

Peter Singlehurst                      © Baillie Gifford & Co

These changing circumstances require a new approach to investing in late-stage private companies. This is a challenge that many have not yet addressed. Earlier-stage venture capital funds, with lives of seven to 10 years, often exit just as the companies are hitting the steepest part of their growth curve, while public markets investors miss out on the earlier gains. This leads to asset owners being underexposed to this exciting part of the market.


To access the best growth and later-stage opportunities at attractive valuations, it is not enough for asset managers to simply mimic the "operating partner" model from early-stage venture capital. At this stage, founders do not want another investor on their boards to tell them how to run their companies. Unlike public companies, private ones choose their shareholders. Only those they believe are both aligned with their founder's time horizon and can nurture their growth ambitions are allowed to access their funding rounds.


What makes an investor the partner of choice for the world's most innovative private companies? This question is key as institutions consider which asset manager will best facilitate access to these private opportunities.

First and foremost, it's a focus on the company's long-term development. There is a lot of capital chasing private deals and no shortage of investors who can write a large check at a premium valuation. The recent flurry of special purpose acquisition company activity has also highlighted the role of short-term investors, investment banks, fees and potential misalignments of interest as companies scurry to the market while perceived valuations are high.


Having cash is not enough to access the best deals, however. The most interesting founders are often mission-driven, focusing on long-term success rather than short-term valuation. They look for a trusted partner within the venture capital ecosystem of founders, public market leaders and earlier-stage investors. Having this reputation helps generate early access to a broad spectrum of the most promising deals across the globe.


To support this long-term success, the ability to provide long-term, supportive capital up to and beyond the IPO is critical. Founders look for investors who embrace risk, support innovation, invest over multiple funding rounds and encourage them to lay the foundations of future success beyond the IPO. They also value a patient voice that encourages other shareholders to think likewise. A longer-term time horizon enables founders to go through multiple funding rounds with no pressure to IPO before they are ready, just because it may suit the liquidity needs of investors. Companies are free to pursue their long-term strategic objectives rather than obsessing over the risk of short-term tactical missteps.


The ability to continue to hold and even add capital post-IPO is also attractive. Founders do not want a wholesale change of their shareholder base at IPO as early backers cash out and are replaced by a host of new owners, many with differing motivations and investment horizons.


Having experience with public markets is important as founders seek help to position their companies for further growth beyond an IPO. This may involve discussing the governance practices necessary to achieve a successful IPO, which will maximize the probability of success after listing.


The best investors have always sought to provide long-term capital to truly exceptional businesses, allowing their clients' assets to compound over time. That has not changed. What has changed is the way these companies capitalize themselves. A different approach is required, thinking beyond the public and private pigeonholes that the investment industry has imposed.


Peter Singlehurst is the head of private companies at Baillie Gifford, based in Edinburgh. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.

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