“The push towards more information transparency, globalization and evolving private company structures means that the fundamentals of the private market are constantly changing. What can be certain though is that the rise in private investment is here to stay and will increasingly be more open to investors globally.”
The private 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. Many 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 ecosystem of the private investment market.
- Startups 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 went IPO in 1997, its market cap was $438 million. Today, its market cap is $202 billion, which is 460 times higher than the IPO price. Compare this to Alibaba. When Alibaba went public last year, its market cap was $155 billion. In order for investors to make the same kind of return in Alibaba as they did in Amazon, Alibaba has to grow to a company with a market cap of $71 trillion by 2032, which is almost impossible. Because of the current trend, many investors are missing out, and therefore they have to invest in the private market in order reap the higher (potential) returns.
- Globalization– Globalization 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 investments more popular than ever before.
- Information Transparency– Startups are not as ‘mysterious’ as they once were. Information on startups and private companies is now more transparent and can be readily found and attained. There are databases, analysis of different type on startups, 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 private companies, but also makes it easier for them to track their investments.
- The Rise of Syndication Model– The rise of the syndication model has largely broadened the investor base. With the syndication model, one lead investor can lead the deal, and many other investors who wouldn’t have participated in the past can now follow the lead investor and back the deal. Lead investors undertake due diligence and set terms for investing.
- Rich Valuation– Lastly, valuations on private companies have reached the richest level in the past decade. There are currently 91 companies valued at $1 billion or more by the VC firms, compared with just 56 a year ago. Everyone is talking about chasing unicorns (e.g. the next Uber), which is pushing the valuations even higher. The higher these valuations become, the more 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.
Timothy Yang, Director, Business Development at DealIndex says, “The push towards more information transparency, globalization and evolving private company structures means that the fundamentals of the private market are constantly changing. What can be certain though is that the rise in private investment is here to stay and will increasingly be more open to investors globally.”
No longer is private investment just within the exclusive domain of the traditional private equity and venture capital firms.