Growth behind closed doors – Are public market investors missing the action?

Many of history’s best investors followed very simple investment philosophies. Buy great companies early and hold them; the market will do the rest. Until a few years ago, this was widely regarded as a textbook strategy.

But what happens when you can no longer buy companies early? When their value has continued to compound for many years in private?

These are the questions many are now facing, as public investors are increasingly being asked to pay a premium for growth that has already been banked by early private investors.

Historically, a company could innovate, grow to a modest size, and list on a stock exchange to fund its expansion. For some businesses, a rapid growth phase could be unlocked post-IPO, allowing public market investors to participate in the value creation stage of those rare future titans, still in their early years.

Today, that model appears increasingly dated. Many of the most dynamic and fastest-growing companies in the world are choosing to stay private for longer – potentially indefinitely.

Fuelled by a plentiful supply of private capital, raising funds from public markets is no longer a requirement, even for some of the largest companies in the world. This shift is driving an increasing proportion of the world’s growth and innovation to be captured by private market investors.

Rather than providing additional capital to innovative companies, public markets are increasingly being used more recently as a tool for founders and private investors to exit their mature businesses. With companies now coming to market in their senior years, there may be less growth left for the outsider.

In the burgeoning tech boom of the 1990s, public markets were the undisputed engine room of wealth creation, generating truly astronomical returns for savvy retail investors.

Never was this clearer than with the case of Amazon, which joined the New York Stock Exchange in 1997 as a risky, loss-making online bookseller valued at a mere-in-hindsight $438 million. Despite bold promises to become the so-called "Everything Store", at the time the company was still in its infancy, just three years old and by modern standards, venture stage.

Public vs. Private Returns

Yet for those who believed in Amazon’s online potential, an initial $1,000 investment at IPO could have seen the value of their holding increase to a staggering $1.14 million in the following 26 years. In that time, the company grew from an initial valuation of less than half a billion dollars to over $2 trillion, with the vast majority of Amazon's value creation occurring in the public markets.

There are other examples. Microsoft joined the public markets valued at $777 million, as a profitable, but far from dominant player in the PC market. Consequently, those who invested in the 1980s could have participated in its subsequent meteoric rise towards a valuation of $3 trillion, a far from typical outcome in public markets.

The turning point arguably occurred following the advent of social media, where a flurry of private capital eager to enter this burgeoning new industry allowed founders to resist the regulatory burden of a public offering.

Most famously, Facebook, now renamed Meta, entered the market as a fully formed mega-cap, having already established itself as a dominant global platform with nearly a billion users. The company already commanded a $104 billion valuation when it held its initial public offering in 2012, allowing private investors to capture a portion of the 9,313 times increase in valuation that occurred in the 8 years post-founding. The float minted fortunes for its venture backers, including Accel Partners, which is reported to have invested $12.7 million in the business in 2005 at around a $100 million valuation.

Yet for those in the public market, the stock has had a volatile ride, increasing just four times in the decade following its initial public offering, before rising more sharply and doubling in the last five years. A particularly striking example of this disparity between private and public returns, even for those investing in a future industry leader.

In this new era, a portfolio limited to public equities is now one increasingly restricted to a shrinking, and progressively maturing, slice of the global economy. Private markets may ultimately become the only avenue through which investors can position themselves to capture growth in the next dominant industry, whose constituents are typically underrepresented on the stock exchange.

For the sophisticated investor, the costs of ignoring private markets could be growing. But how can individual investors gain access, and what are the risks?

The rise of semi-liquid funds has considerably lowered the barriers to the previously gated kingdom of private markets. In contrast to traditional drawdown funds, semi-liquid funds are evergreen and accept new capital and allow redemptions on a rolling basis – normally once a month or quarter (although a long-time horizon is still encouraged). These funds provide an easier and more flexible way to reach companies not traded on a public exchange, helping eligible investors, diversify their portfolio into the private sphere.

Funds such as these, from leading Private Markets managers, can be accessed through the Private Markets service from Wealth Club, starting with a minimum £10,000 investment. This platform allows eligible investors to reach a range of Private Equity, Private Credit, Secondaries, and Infrastructure vehicles, each of which is reviewed by our in-house research team.

However, it is important to state that while the opportunities in private markets are compelling, they still carry distinct and elevated risks that make them unsuitable for the typical retail investor. These investments could take many years to generate a return, if at all, and should be approached as long-term commitments. Additionally, regardless of the theoretical liquidity terms, Private Equity investments are not easily realisable and restrictions can apply, so eligible investors should only use money that is not needed for several years. They are high-risk investments and vulnerable to heightened levels of pricing uncertainty compared to publicly traded alternatives: you should not invest money you cannot afford to lose.