The private company investment sphere has long been the traditional domain of private equity and venture capital firms. However, in recent years, many institutional and retail investors have increasingly taken an interest towards investing in this exciting
and promising sector. Several hedge funds are now running a hybrid model where they are not only investing in the public markets, but also late-stage startups. While this is happening, retail brokers are looking for different ways to diversify their portfolio
by investing a portion of their portfolio in small private companies. What is driving this recent phenomenon? Listed below are the key factors that are helping to shape the new private investment market:
1. Start-ups are Going Public Much Later – With all the money flowing into the private sector, companies are going public at a much later stage than before. Take, for example, Amazon. When Amazon IPO’d in 1997, its market cap was $438Mn. Today, its market cap
is $202Bn, which is 460 times higher than the IPO price. Compare this to Alibaba. When Alibaba IPO’d last year, its market cap was $155Bn. In order for investors to make the same kind of return in Alibaba as they did in Amazon, Alibaba would have to increase
its market cap to $71Tn by 2032 - which is near impossible. Due to this trend, many investors are missing out on the benefit of investing in early stage companies, and are therefore having to invest in the private market in order reap the higher (potential)
2. Globalisation – Globalisation is helping private investments reach a broader audience. Today, companies do not need to be restrained to their local markets in order to seek funding. Thanks to the Internet, companies can easily market themselves, raise funding,
and make financial transactions online. At the same time, investors are looking abroad in order to diversify their investment portfolio. The ease of making investments and raising funds globally is making private investing ever more popular.
3. Information Transparency – Startups are not as 'mysterious' as they once were. Information on start-ups is now more transparent and can readily be found and obtained. There are databases, and analysis on different types of start-ups, venture capital firms,
and angel investors etc. The abundance of all this wealth of information has not only instilled investors with greater confidence towards investing in start-ups, but has also made it much easier for them to track their investments.
4. The Rise of the Syndication Model – The rise of the syndication model has largely broadened the investor base. Using the syndication model, one investor can lead the deal, and other investors (who probably wouldn’t have been able to participate in the past)
can now just follow the lead investor and back the deal.
5. Rich Valuations – Lastly, the valuations of start-ups have reached their richest levels in the past decade. There are currently 91 companies valued at $1Bn or more by the VC firms, compared with just 56 a year ago. And all the hype around unicorns (e.g.
the next Uber) is pushing the valuations even higher. The higher these valuations become, the more it seems investors want to invest in them.
The above five factors are largely driving the changes witnessed in the private investment market today. Just like the public market though, the sphere of private investments is not without its associated ups and downs. The push towards more information transparency,
globalisation and evolving private company structures means that the fundamentals of the private market are constantly changing. What can be certain though is that private investment is here to stay and will increasingly be open to more investors globally.
No longer is private investment just within the exclusive domain of the traditional private equity and venture capital firms.