Page 41 - Investment Advisor March 2022

ALTERNATIVE INVESTMENTS

By Josh Vail

What ‘Private For Longer’ Means for Investors

This pre-public avenue is important for advisors to understand and access
for clients.

he case for private mar- growing supply of private fund-
ket investing often centers ing, a strong secondary market and
Taround where. With the num- emerging structures like continua-
ber of public companies shrinking, tion funds are making it easier to
the bulk of innovation and dynamism stay private longer.
in corporate America is happening at • The third reason comes down to
private companies. strategy. “The Street” can ham-
But an addendum to the case for mer a company’s stock if it misses
private markets should center around on earnings or looks like it is slip-
when. There is growing evidence that ping on the near-term execution
companies are deciding to stay pri- of its plan. The longer a business
vate longer, experiencing more of their Another indirect way to look at how puts off going public, the longer it
growth cycle outside the sphere of companies are growing in private mar- delays managing quarter-to-quarter
public markets. kets is through the rise of “unicorns,” expectations so it can focus on the
For investors, the implication is clear: those companies reaching private market long-term growth strategy.
With a steeper part of most companies’ valuations of $1 billion or more. Since
growth curve happening privately, an 2005, CB Insights states there are more NO ONE IS LOCKED OUT
allocation to private markets is becom- than 900 unicorns. A study that appeared If private markets are where more
ing necessary for nearly all investors. in the Journal of Applied Corporate growth occurs, it is essential that more
Finance found that roughly 60% of uni- investors are allowed to participate.
WHERE AND WHEN corns stay private for at least nine years. New fund structures are opening
The argument about where growth In short, that is long enough not just those markets up. Registered private
is happening is still relevant. There for a business strategy to hatch, but equity funds, often called evergreen
are only 2,600 public companies with for full-scale disruption of an industry funds, remove some of the traditional
annual revenues greater than $100 mil- before the company ever experiences its private investment hurdles by offering
lion. That’s a small slice of corporate IPO. Uber and Airbnb, two of the largest limited liquidity, smaller minimums and
America, where there are 17,000 pri- ever tech IPOs, put the trend of private eliminating the timing delays associated
vate businesses of that size, according for longer in context. The two compa- with funding requirements. There are
to Capital IQ. Further, the size of the nies waited 10 and 12 years, respectively, now more than 150 interval and tender
public pie is shrinking. At the begin- before going public. By that time, they offer funds, and nearly 40 more in reg-
ning of 2000, there were 7,810 publicly had already largely displaced the taxi istration. The majority of those access
listed companies. By the end of 2020, and vacation industries. private markets in some shape or form.
it was just 4,814, according to research There are a few reasons why compa- Traditional risks to private invest-
by Professor Jay R. Ritter, University nies are staying private: ing still apply. Investors need a long-
of Florida. • The first is the regulatory head- time horizon, and while evergreen funds
Of equal importance, those who do ache. Sarbanes-Oxley has increased present some level of liquidity, these
go public appear to be waiting longer the regulatory burden on compa- funds are still less liquid than a standard
to make the jump. Within the technol- nies. Why face it if private capi- mutual fund vehicle. And as more funds
ogy sector, for example, one study con- tal remains available to support a are created, performance dispersion
ducted by Professor Ritter found that • The second reason ties to the among them could increase.
business?
Adobe Stock had gone from 4.5 years in 1999 to more first. Access to private capital has Josh Vail, CAIA, is managing director of
the average age of a new public company
grown considerably. Beyond the
than 12 in 2020.
Hamilton Lane.

MARCH 2022 INVESTMENT ADVISOR 39