As Companies Stay Private Longer, Advisors Need Access to Private Markets
It’s no secret that Initial Public Offerings (IPOs) have been the go-to fundraising tool for companies of a certain size for over a century. However, the investing landscape has changed since the heyday of IPOs.
Consider the following:
- In 1980, the median age of a company at its IPO was 6 years, whereas in 2021, the median age was 11.
- In 1980, the median market value of a company at its IPO (adjusted for inflation) was $105 million. In 2021, the median market value was $1.33 billion.
- From 1980 to 2000, there were more than 6,500 IPOs. From 2001 to 2022, there have been fewer than 3,000.
The reality is that many companies are following SPL or Stay Private Longer. Rather than selling shares to the public, these businesses are turning to venture capital funds and the private market. In other words, the boom of early company growth is largely reserved for Ultra High Net Worth, accredited investors. As a result, everyday investors may be limited in their access to quality companies.
First, Some Background
Given IPOs were once a top choice for many investors, the question remains why has that system changed over the years, and why has the IPO become less appealing than ever for companies and investors alike?
One reason is that due to the growing popularity of private investors and venture capital funds, companies no longer need to go public in order to raise money, allowing them to retain control and ownership over their company for a longer time. Then there’s the fact that a stock can lose significant value on Wall Street if it misses on earnings or is perceived to be faltering on the execution of its plans. Add the regulatory burden on companies, and SPL starts to make sense.
Due to the rise of SPL, many companies have already achieved a boost by the time investors have a chance to buy in. In some cases, investors could even take a loss by investing in companies that have just gone public.
Take Uber for example. In 2010, one year after its founding, the ride-sharing app was valued at $5.4 million. By the time they were ready to IPO less than a decade later, analysts put their value at more than $120 billion. Understandably, investors were eager to invest in the company that set a record as the most valuable startup in the world.
Uber went public and made history once again – for the the largest first-day IPO loss of all time. On May 9, 2019, a single share of Uber cost $45. The next day it was down to $42. Barely three years after their IPO, Uber traded at less than $22 per share.
What seemed like a great opportunity to invest in a huge company turned out to be a case of getting on the elevator on the top floor. So what happened?
Uber was an early example of the impact SPL can have on IPOs. By the time they opened the doors to let the public in, the exponential growth phase had already come and gone. While early investors had enjoyed significant earnings, public investors were largely left with losses.
The question marks surrounding public markets could make them a far less enticing investment than they once were, leaving many investors and advisors enticed by the opportunity to invest sooner in a company yet to peak. With only 2,800 public companies with annual revenues greater than $100 million, it makes sense that investors are increasingly seeking to access this attractive opportunity.
Enter private market funds: a modern update created to give investors an entry point into companies before they go public.
Accessing Private Market Opportunities
It’s important to understand how private market investments as a whole differ from traditional investments. This area of investing may include asset classes with relatively low correlation to the stock or bond markets such as real estate and commodities, or non-traditional approaches to investing within special vehicles, such as private equity funds and hedge funds.
Given characteristics including less regulation and less transparency than traditional investments, limited historical risk and return data, unique legal and tax considerations, higher fees, often including performance or incentive fees, highly concentrated portfolios, and possible restrictions on redemptions, they had been limited to accredited investors, considered sophisticated enough to enter into these investments with the knowledge and ability to take on this type of investment.
The good news is that with a surge of new fund structures that allow investors to access these investments, they are no longer monopolized by the ultra-wealthy. The golden days of IPOs may be long gone, but thanks to private funds, investors have a new way to get in at the ground level before notable growth occurs.
Offerings like TIFIN Private Markets provide democratized access for advisors who want to connect their clients with early stage companies. Through such marketplaces, advisors can access private funds with lower fees and minimums than ever before, not to mention increased liquidity. Within these platforms, experts do the research and advisors can help their investors access this growing asset class without having to do the heavy lifting themselves.
As investments in private markets continuing to hit all-time highs, it’s critical that advisors can facilitate this access as to not lose out on clients taking their assets elsewhere. Don’t miss out on providing your clients with the investments they seek within a key asset class.
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