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Which is the best route to profit from fast-growing unlisted firms?

Which is the best route to profit from fast-growing unlisted firms?

24th August 2021 10:35

by Jennifer Hill from interactive investor

 

Jennifer Hill pits private equity trusts against growth capital trusts.

Listing on the stock market used to be seen as a mark of success for companies, but with many choosing to stay private for longer, opportunities to invest in unquoted businesses have grown.

With their closed-end structure and stable base of assets, investment trusts are an ideal vehicle for investing in unquoted companies. Growing demand for investing in later-stage private companies led the Association of Investment Companies (AIC) to introduce the growth capital sector in May 2019.

“The strategy has become more popular as asset managers have realised the growth opportunities in the unlisted space with companies staying private for longer,” says Jayna Rana, an investment companies analyst at QuotedData.

She adds: “Even mainstream names such as Scottish Mortgage Ord SMT and Fidelity China Special Ord FCSS have performed well from their unlisted investments.”

Investment in unquoted shares is the common denominator between the growth capital and traditional private equity sectors. Thereafter, there are several key differences.

Maturity

One key factor for investors to consider is where they want their investment to sit in terms of maturity – at the early stage of a company’s evolution, where there is arguably more risk but greater reward, or at a later stage when the business model is more established but still to reach its full potential…

Risk

Early stage companies offer greater potential reward for taking a higher level of risk; back the right horse and you could be in for a big win…

Influence

Ownership of underlying companies is another key difference…

Portfolio

Growth capital funds are characteristically concentrated in fewer holdings, some targeting 30 to 60 positions, whereas private equity fund of funds (which partner with private equity fund managers) have a much larger number of holdings…

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