Steven Tredget, Partner at Oakley Capital, writes that more companies are remaining private for longer while public markets are shrinking, with profound implications for investors.
Are we running out of companies to invest in? Not quite, but the universe of quoted stocks is declining. Data shows that over the last ten years, the number of listed companies across the US and Europe including the UK fell more than 20 per cent to around 11,000.
At the same time, the number of private companies is expanding. Business owners are remaining private for longer, often looking for alternatives to listing on the stock exchange and the onerous reporting requirements that come with being a plc.
Many instead are choosing to partner with private equity firms, who have plenty of capital to deploy as institutional investors looking for strong returns pour more money into this growing asset class. Investment bank Morgan Stanley estimates so-called private capital, encompassing private equity, debt and infrastructure, expanded to USD7 trillion in 2020 and will almost double by 2025.
The result is a stark situation for private investors who are left with fewer companies to invest in, and an asset class that is becoming harder to ignore.
Up until now, investors have chosen to largely ignore private equity (‘PE’). They will often hold a sceptical view about this asset class and the industry that supports it, thanks to negative coverage in the media. Newspapers often portray private equity firms as corporate raiders who swoop on undervalued companies to buy them on the cheap, then load them up with debt and cut jobs. This was certainly one of the arguments made in the recent takeover battle for UK supermarket chain Morrisons.
Commentators also argue that private equity is only accessible to large pension funds and billionaires- ordinary investors don’t get a look in.
While it is true that some PE-backed companies have failed, there are plenty more success stories you never read about. Indeed, data from industry body the BVCA shows that UK private equity firms are significant contributors to employment and wealth creation, sustaining almost a million jobs and contributing almost GBP20 billion to GDP. Most PE firms just quietly get on with the important business of backing entrepreneurs with money and advice, helping them to grow their businesses.
Indeed, it is precisely for their growth expertise that many business owners partner with PE backers, and particularly after a crisis such as a global pandemic. They may have experience helping companies to find new markets overseas, transition to a digital business model, or help improve their financial management and reporting.
But perhaps the more important point to address here is the misconception that private equity is just for institutional investors and the super-rich. This ‘them and us’ narrative is partly to blame for fuelling the negative perceptions of the industry in the media.
In truth, the range of avenues to private equity has expanded rapidly. Platforms such as Moonfare enable investors to choose from a range of investing options, including buying into specific private equity funds. Some private equity firms have floated themselves, allowing investors to buy shares in their business. And a number of firms also have listed investment trusts, such as Oakley Capital Investments, providing liquid access to the same investment opportunities that institutional funds and ultra-high net worth investors invest in.
Whether you’re choosing to invest in a PE fund or to back the PE firm itself, think about their investment strategy and track record, just as you would with any fund manager.
Private equity is a long-term business: funds typically have a 10-year lifespan, so a strong track record through market cycles is usually a good indicator of future performance. It may be helpful to look for a manager with a clearly defined strategy – a repeatable playbook – which may demonstrate that they can continually source and execute deals for companies at attractive valuations.
With more companies remaining private for longer, especially in attractive industries such as technology, investors should consider using private equity as an effective way to access these opportunities and the strong returns they generate.