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‘Your opportunity set has been cut in half’: Why venture capital is booming
As the amount of capital available to them soars and equity markets grow more volatile, companies increasingly don’t want to go public – and don’t need to.
The number of publicly-listed companies on US exchanges has roughly halved from 8000 to 4000 in the last 20 years, according to Liberty Street Advisors. And while part of that is down to consolidation, it’s mostly due to the fact that the amount of capital now available to private companies is simply “astronomical.”
“Your average technology company back in the late 90s went public around for years after it started, and a large reason for that was that they often didn’t have any more capital to raise in the private markets,” Christian Munafo, CEO of Liberty Street Advisors, told the Inside Network’s Alternatives Symposium on Wednesday (February 23).
“At that time, the average market cap of those companies was roughly half a billion dollars. Fast forward to today and we have companies staying private for 12 years – sometimes 15 or 20 years – and as a result of that they’re growing into much larger, much higher market cap businesses.”
Liberty Street manages around US$800 million in its Private Shares Fund, aimed at late-stage high growth companies, and in February entered into a strategic partnership with GAM to offer the capability to international investors. Its analysis of 20 years of IPO data found that the returns for investors who waited for companies to go public compared to those who bought in at the last capital raise “weren’t even close.”
“Microsoft, Amazon, Apple, Google – a lot of the capital appreciation for those companies happened as a publicly-listed businesses,” Munafo said. “Now in the current state of affairs, most of the capital appreciation is happening when you’re private. If you’re a public market investor and you don’t have access to that private capital growth, you’re missing out on a substantial opportunity.”
“You’re investing in these businesses at a point in their lifecycle where they’ve already demonstrated that their product or products work. They have a large addressable customer base, they have clear revenue trajectories… You’re more focused on growth and execution risk.”
The greatest opportunities, to Munafo’s mind, will come in areas like the space economy, as well as fintech, cyber security, and healthcare – areas where incumbent offerings are ripe for disruption by digitisation. He also expects that more companies will stay private for longer to avoid a burdensome regulatory environment, and that the SPAC craze represented an effort to circumvent that environment.
“We’re looking for businesses that are very efficient in terms of their ability scale, so they’re not managing substantial burn rates,” Munafo said. “Think of the WeWorks of the world, where you have this path to zero profitability. We’re looking for companies that are much more capital efficient and have the ability to solve real problems across these underlying sectors… and do so with very strong operating metrics.”
Private companies also benefit from the fact that they’re sheltered from market noise in a period of increasing uncertainty where public market returns will be muted.
“It’s not that private companies are invincible to macro shifts and events in the public markets, they just don’t have the same idiosyncratic exposure to these behavioural trading events,” Munafo said. “… We’re absolutely going to see some chop – we’re seeing it right now. And a lot of the private companies are happy they’re private because they’re being sheltered from the immediate whiplash we’re seeing in the public markets.”
“If we could select from an M&A event or a public event, nine out of 10 times we’d go for the M&A event, assuming it’s a cash deal, because of the amount of baggage that comes with the public offering. If you have to ride out your position for a lockup period of six months, especially in a period of increased macro uncertainty, you can see the value you think you’re getting at the IPO cut dramatically in half if you have a whiplash in the public markets.”
