Gateway to private markets

Hannah Smith, AIC’s Compass, 4 February 2022:

Unquoted companies offer the exciting potential for unbridled growth, albeit with a high level of stock-specific risk. With companies taking longer to reach IPO stage, there are more opportunities in this space, and now even mainstream investment trusts are making unlisted businesses a significant part of their portfolios.

Unlisted for longer

Last year, private equity activity in the UK market reached levels not seen since before the global financial crisis, with deals worth £45.8 billion, according to the Centre for Private Equity and MBO Research .

Thanks to technology, companies are increasingly able to scale up without having to come to public markets to raise money. By staying unlisted for longer, they can retain more control of their business as they grow.

“There was a time when any company of size and ambition would opt for a market listing as soon as it could, for both the capital and prestige,” explains investment trust expert Andrew McHattie. “That has changed now, and companies are staying private for longer, tapping into new sources of capital outside of the public markets and enjoying more freedom away from the media glare and the need to show progress in each quarterly set of figures.

“For investors, this means there are more high-quality opportunities than ever amongst unquoted companies that remain private because they choose to, rather than because they are too small or failing to meet corporate governance standards.”

Because companies are coming to market later, waiting until IPO to invest could mean missing out. “The real growth is happening while these companies are private,” says James Carthew, head of investment companies at QuotedData. “They only come to market when everyone’s made their money and wants to cash out.”

While there is huge growth potential if you back a future winner, the risk is also much greater in early-stage businesses, and portfolio managers need a different skill set to choose correctly in this sector.

“It’s a different sort of risk, so shareholders have to be comfortable with the fact that, when markets are racing, you might get left behind for a while because valuations in private equity happen infrequently and they’re still quite cautious,” Carthew adds.

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