Bridging the gap between private and public markets

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Paulina McPadden (PM): So, Robert, could we maybe start off and you could talk a bit about why Baillie Gifford got into private investing in the first place?

Rob Natzler (RN): Yeah, sure. So we had always been, as a public house, in touch with and researching private companies. And what we found, particularly as we got into the 20 tens, was more and more of these private companies were interested in building relationships with their future IPO stakeholders long before the IPO roadshow itself. You were getting access initially in these pre-IPO rounds and then increasingly several rounds before the IPO to some of the most interesting growth companies you could ask to have access to. Growth obviously means something a little bit different to everyone. For us, you know, the average company we've ended up investing in for our clients has been 200 million in revenue, growing at 70 per cent, and loss-making. So -14 per cent EBITDA, almost always more than 90 per cent of the time, founder-driven, founder-led. And what we found is that Baillie Gifford's brand really resonated with that kind of company, the kind of business that was a best in class category leader, which knew that it wanted to go to public markets eventually, but actually thought, if we can put that off for two years or four years or six years, we could still achieve a lot in private markets.

We could take much bigger risks than we'd be able to take in the six months or 12 months after the IPO, where predictability is obviously so important. And so we were getting this access and then at the same time, we were seeing challenges for, our clients because they were wanting exposure to these really high-quality growth companies.

The kind of companies that they would have automatically had access to by investing in public growth portfolios back in the early 2000s. And yet that the now very well understood phenomenon of later for longer was playing out. You know, over the last 15 years, we've seen the number of, of private companies, in the United States with more than 100 million of revenue go from, under a thousand to over 11,000. This enormous growth of these real growth businesses. And that's coincided with an increasing concentration in public markets. And so clients were saying, actually, we've got this growing demand for an exposure on the private side, that we're not getting from our venture capital portfolios, which are going way earlier that we're not getting from our private equity buyout portfolios, because these are companies that are still found to run and want to stay independent.

And that we're no longer getting from our public market portfolios automatically. So it was very much kind of a supply and demand meeting moment. Inevitably that that description is, as you'll remember, is slightly neater than the messy reality. It took quite a few years for us to realise.

PM: It's very neat in retrospect.

RN: Very neat and really obvious what was happening in 2011 when we were having those conversations with, Jack Ma at Alibaba. It was really non-obvious. It just felt like this incredible opportunity to buy, a remarkable Chinese e-commerce company on the cheap privately. And so making that decision was the right decision. And it was probably only 2015, 2016, that the slowpokes that we are we actually joined the dots and worked out there was a pattern here.

And so, yeah, from, from 2011 to 2019, we were doing this, in a boutique way for a small number of our largest institutional clients. Often doing these, these blended portfolios, certain percentage, private, a certain percentage of public. But then by 2019, we had enough evidence that we were good at it. Enough evidence that we had access to the best of these companies, and importantly as well, enough evidence that the demand for this wasn't just limited to our most sophisticated, largest clients.

PM: And enough evidence that it was a structural thing, and it wasn't just something that could be fulfilled by this individual segregated mandate wasted.

RN: So many years, wondering if this was just a side effect of low interest rates. And looking back, it's really obvious that it wasn't like looking back at it's really obvious that the internet just fundamentally changed information dynamics. And that whereas in 1999 or 2000, you really had to go public if you were to escape, the venture capital pool in your own cluster and draw money globally.

In the 20 tens? No, you could really go global and you could find high quality private shareholders from around the world without listing on an exchange just yet. But, yeah, it took a long time to get there. But then in 2019, we launched our first pooled vehicle in the space that was an evergreen, vehicle. And a few years later, we launched our first, GPLP fund for, sophisticated American institutions.

And, and it's been all guns blazing since then. So that's how we got into it. But I think the thing that I've probably dropped from, from my telling is, you know, I sitting on the private companies team, I see this as something about investing in the best private companies and providing that access to our private company clients.

There's obviously also been that the public markets angle.

PM: You know, it was interesting that point you made that, you know, 20, 30 years ago, the best private companies would have IPO had much sooner in their life cycle. And because they would have IPO sooner in the life cycle, they wouldn't have necessarily become the types of companies we invest in until a way through their public life. And we would have had time to build up a relationship and build up understanding of what these companies do.

There would have been years of evidence of material that they had produced around what they had achieved. And because they're staying private for longer is that no longer happens nearly to the same extent. And one of the challenges as a public market investor, I found, is that when you are presented with an IPO from the sell side, you are given, maybe, if you're lucky, a 45 minute meeting with management, usually a group meeting with management, you're given access to three years of financial data, and then you have a week at best to make a decision.

RN: It's crazy.

PM: It's absolutely wild. I mean, it's not that different, I think, from private companies in some ways, which I'll ask you about that later because I am interested in that. But sticking with this particular topic for a moment, that sort of information asymmetry and that lack of time to be able to develop an understanding of what a company does is really harmful to the way in which we invest, because if we're thinking about the next 5 or 10 years, we need to be able to build deep conviction in what a company's doing and how it can be successful.

One of the examples I think that's really good of that is Wise the payments processing company and, cross-border transfer, processing company, where that's a really complicated space. There's many companies operating in that space trying to understand what each one is doing and exactly where their competitive edge lies, and understanding how the pools of liquidity that Wise, is created create a competitive edge for them in the long term.

You know, that takes time. You don't you don't learn about that in a 45 minute meeting. And so the fact that we did have a relationship with certain things to the work of your team was tremendously valuable. And it's now a holding across multiple strategies in Baillie Gifford. The other learning, it's slightly less direct, but I think just as important, if not more so, is because so many companies are staying private for longer.

There is a vast number of potential competitors to the companies that we own emerging around the world. The most obvious example of that is NVIDIA, because I remember years ago, back before generative AI was even a thing, you and I were in the US and we were visiting other AI companies like Cerebras and Grok. We've also met with Graphcore in the UK, and that was tremendously helpful to me at the time because I was looking at Nvidia.

We became NVIDIA shareholders in 2016. In terms of understanding, okay, there are all these other companies that are potentially trying to eat their pie. You know, Graphcore saying that they could 10x their sales and it's underpinned by these contracts from Amazon and Microsoft. That's scary stuff. But because you maintain that relationship, you're then able to find out, well, actually none of that happened over a year's time.

And it really underpinned the conviction that we had an invidious competitive advantage around the network of developers. You know, the 500 million developers that they had using their CUDA software and just how difficult that is to undermine, despite the wild promises that that these companies might have had. That does, however, raise a question for you guys, because I'm talking about the sharing of information and how useful is that information about private companies is to me, how do you actually manage that on your own? Because there's potential conflicts of interest, like.

RN: Yeah, I mean, it's a thicket. We have a few guiding principles. The first of those is we don't believe that, we can do this job honourably. If if companies worry, the stuff they tell us is going to get to their competitors. So it's one thing, having conversations with Stripe and then sitting down and getting access to all of our in-house knowledge and understanding of Adyen, which is also an investor of ours.

It would be a totally different thing if we were passing intelligence that we received from Stripe to Adyen, or for that matter, from Adyen to Stripe. So we need to have very tight firewalls about where the information that we get from these relationships goes. We do believe very strongly that it is in our interests, as investors and therefore in our clients interests as well, to pool the understanding between the analysts at Baillie Gifford.

RN: But it's a very different thing to to be passing that to the outside world. Now, the investment floor, as you know, is a really tight knit group of people have known each other for a long time. And, and we have multiple sessions during the training scheme for analysts that really hammers the importance of this home. But we're a bit paranoid, so we actually go a step beyond that.

RN: We share in written form a small part of the meetings that as a team we conduct, but otherwise we try and make sure that information about private companies leaves the private company team in a slightly more targeted way than simply uploading everything to the central research database. In that way, we can make sure that if we are putting something on the database, it's put on in a form where people are really clear that this isn't something to be shared lightly, but also where, the, the balance of risk is appropriate.

PM: Yeah. I mean, that's really interesting because from the outside looking in, it can seem like the private companies team is a serene team. You don't publish much on the research, maybe for the reasons that you said, if you're in the know and you get access to some of these research nodes, if they're irrelevant to the team that you're on.

But I imagine that underneath there's a lot of frantic paddling going on, because one of the things that strikes me about public markets is they're always available, like the market's more or less always open, or you might have to wait a few hours because it's night time. So when you're looking at a company, you don't need to make a buy decision in any particular space of time.

Normally there are always exceptions. Obviously IPOs being one of them, as we've mentioned, but that, you know, that creates a different way of working. We've exploited that in a lot of ways here at Baillie Gifford. You know, we're based in Edinburgh. We're very removed from the typical Wall Street, London financial noise. We're a partnership. We don't have external shareholders that we have to report to.

PM: We have a deeply ingrained, no blame culture. So everybody can take their time and, you know, let the 5 or 10 years pass before making a judgment call about whether an investment has worked out or not, if you need that. But private companies are dictated by deal flow.

RN: Yeah.

PM: You have to make a call when it's presented to you. Yeah. How do you manage that?

RN: Gosh, there's a lot there. I mean, the first thing to say is that, no is always a call. Like most of the companies we've invested in, we met and declined the first time around. We like to take our time to build an understanding and, often with these businesses, you know, if we know that they're one of the best businesses in their space, we will get multiple chances to build a relationship and build a position in them.

And that's really helpful psychologically. There's definitely a lot of frantic, duck paddling underneath the surface. The last time I looked at the stats, I think we as a team, in the last 12 months, did over a thousand meetings. So even though we're less than, 10 per cent of the headcount, we do more than 20 per cent of the meetings, and of as a thousand meetings, we ended up, writing 60 1st slice, pieces of work, 30 2nd slice and made 11 investments. So that's the amount of paddling a thousand meetings to produce 11 investments on the other side. Yeah, it's a lot of work and it's relationship-building work.

Plenty of those meetings were with companies that turned out not even to be raising. And the next 12 months, like, it's not unusual. I mean, there's a deal that I'm working on at the moment, which is a business I started talking with in 2022. So there has been back and forth. I've gone to visit them. We've had zoom meetings.

I've gotten to know different shareholders. And now finally, there's actually an opportunity for them to raise capital and we need to think about if we like the price and no is an option that's going to very much be on the table because you can't get too drawn in to those situations. .

PM: That's not that's not too different from the public markets, to be fair, because there are definitely companies where we've engaged with them for years before making a decision that we want to become shareholder..

RN: And so I think the place where we're similar to public markets is in that willingness to have good faith conversations with management teams really try and understand, to see the world through their eyes, like, why are these highly capable people, betting the farm on building a private company when they could be a high-level executive in an incumbent?

But then also to most of the time say it's just not quite right for us at this point in time and do that in a way that lets you continue to build and compound that relationship over time. But that's a common skill set. I think what's uncommon is the quantity of meetings that you have to do just to understand what's going on in the market.

And yes, to your point, like in some ways, Edinburgh is not the perfect place to do that. Because there are very few private companies in Scotland full stop, let alone in Edinburgh. And so we do find ourselves on the road a lot, visiting the great clusters, whether that's London, San Francisco, Shenzhen, Shanghai, Mumbai, make the list.

We do argue, though, as well, that we do believe Edinburgh is the right place to base ourselves. And there's a couple of reasons for that. First off, you know, thankfully the world loves, castles, whiskey and golf. That means that our little airport here, gets direct flights pretty much everywhere. So the team spend between a third and a half of the year, being out on the road visiting those clusters.

But then we can come back to Edinburgh, flying in and out with those tourists and then come back here to a place where we sit in sights of the mountains, the river, the sea. And just be at peace with our thoughts. And that's really important because I think something that characterises the kinds of private companies we invest in is that it is no longer just a one cluster story.

If you're an early-stage venture capitalist, you're backing people, you're backing product. That is often just a slideshow. You're backing team. And if you're doing that, you really need to understand the product roadmaps in your industry. You really need to understand the technology that you're looking at in your vertical, in your theme, and you need to understand what the corporate acquirer is in that space.

They're going to be picking up because like 85 per cent of VC exits are M&A. Like ultimately that's what most of your exits.

PM: And presumably you also need to have that cluster because if you're backing people, they need to have a network that they can easily tap in.

RN: Exactly. And so that's what you find in San Francisco. You will have people who know everything about enterprise software. In Shenzhen, you will find people who know everything about a vertically integrated hardware or textile supply chain. In London. people know a ton about fintech and so on and so on and so on. In New York, people know so much about marketing. That's really important for an early-stage VC, but at the stage we're getting involved that these businesses are big enough.
That they’re no longer. Just competing inside that city. They're planning on going public as an end of one story. So you need to be able to step back and view the global landscape. And for that, having the ability to go and reach into all of these different clusters, be present in any one of those clusters at least a few times a year, so that you're building those relationships not just with the companies, but with the venture capitalists.

If often been the first capital into them, but then retreat to Edinburgh. So you're not getting clouded by the news like that's really big for us. The final bit that I'd mention is we've actually found that Scotland isn't only a draw for tourists. But but it's also a really nice place to be able to do value add events for all companies.

We hold these retreats, in the Highlands, where we, we rent a castle. And we fill that castle with single malt, and then we bring, CFOs and IR teams, board members, founders, different conferences of different focuses, from not just our private portfolio, but also our public portfolios together. And we let them network with each other and mentor each other.

And the topic nine times out of ten is, how do you take a company public for most founders, for most CFOs, for most general counsels, that's a once in a career event. For the most experienced, it might be three times. So creating spaces for people to do that is actually something that there's a lot of appetite for.

And that's a place where we find the reach of Baillie Gifford public market teams and the relationships that they have with public market companies is hugely helpful because it lets us create events that are purely private, peer set on table to create, and that feeds back into a buzz that we enjoy among our companies.

PM: I mean, that absolutely makes sense. Although the point you make about value add is really interesting. I think probably worth diving into because I suspect there's some nuanced differences there between the work and types of relationships that we build. So, you know, on the public market side, barring investment in an IPO or a sort of placement further on down the line, if a company is raising money, generally speaking, we're secondary shareholders.

You know, we are not providing capital to the company. So that form a value add in most cases is already off the table. So the way that we think about our value add is public share is around being long term and supportive, engaging with the company, you know, recognizing that although they may have to report quarterly and that's always going to have ups and downs in some case cases, extremely significant ones, the world being what it is, you know, our most successful investments almost to a one, have dropped to by 30 per cent or more multiple times.

Being able to hold on to that volatility and reassure management that, you know, when we're asking difficult questions, it's not because we're looking for an exit, we're looking to sell. We just want to understand the story better. That's the way in which we build relationships and support companies. But I suspect that's very different in the private space. You have a lot more levers to pearl than we do.

RN: Yeah, but I think actually can I just push you more on that because I think you're in danger of underselling how much of an impact having a long term shareholder buy in during moments of downward volatility can be, like the depth of the relationships the public teams construct, which we just see, we just get to enjoy the benefits of.

Right. But whether it was Imagination Technologies or Tesla, I mean, they've been time and time again, I've heard and seen public management teams go to bat for us to private founders, you need to be persuaded. I don't know. I worry that you're selling short.

I mean, that's fair. I suppose we I don't see those conversations actually, hearing that is really, really encouraging. It's really nice. Makes you feel very good of, the work that we do. Sometimes it feels like maybe it's not necessarily as impactful as what. Oh, okay.

I've heard, former management team members from, companies that are now in the fortune 100 talk about how different their conversations with pitches public teams are able to be, how they would go from, your standard long online conversation about the next couple of quarters to sitting down with BG and actually getting to talk strategy and how transformational that was to their ability, as busy public market management team members, to actually think about strategy in that time.

And, I don't know, I mean, very happy to talk about private companies, but I might my sense is that that there's a real payoff from building those relationships, with public teams, not only because it means those public management teams share a different kind of insight with you than they're willing to share with a hedge fund for example.

PM: Well, I mean, and we're absolutely reliant on those different kinds of insights because we are trying to do something fundamentally quite different from what the majority of the market is doing. I think we had this conversation a few months ago when we were talking about the value of prediction and over what kinds of time frames you can actually have a more or less accurate prediction.

It was, you know, anything in excess of 50 years or more is probably possible because demographics are more or less set in stone. You can make fairly accurate predictions about the size of the global population, where those people are going to be dispersed for instance, and you can make certain assumptions as a result of that around where the world is going.

And sort of the 1 to 2 year time frame is also more or less possible because a lot of things are set in stone over that time. And, you know, not that many black swan events happen, but the time period over which we invest at 5 to 10 years, it's actually remarkably hard to predict because you don't know what will happen, you know, will there be another Ukraine war?

Will there be another generative AI, something I can't even imagine. And so when we're looking at companies, we're deliberately trying to be imaginative, we're trying to explore what the potential possibilities for them are, rather than immediately narrow down into a particular model of this is what the company has to achieve or a five-year time frame. Yeah.

Now there's pros and cons to that, obviously, because the pro is that enables us to be truly long term shareholders because we've got the eye on the prize, which is in some ways uncertain. But it's big. You know, this company could change. It can develop new products, new services. It could evolve over time to address new markets.

And that's tremendously exciting. And when the share price drops 30 per cent, that's fine, because we have faith in the management. We have faith in the pathway.

RN: If you have faith in the management

PM: If as long as. Yes, assuming the investment hypothesis hasn't completely crumbled, this is this is a happy path. Yeah. The downside of that is we don't tend to be as good at selling. We do tend to hold on for a bit too long because, again, we have that faith and conviction in the management and investment hypothesis.

And I mean, fundamentally, I just think you can't be good at both. You can't own for a long time and sell at the precisely perfect time. Those are just polar opposites in terms of behaviours and psychology. But that's a risk that we're willing to take on the public market side. And to a certain extent, that's a reflection of just the way in which we've invested for a very long time.

It's about looking for exceptional companies and outliers that deliver really tremendous value. Don't just go up 8 per cent a year like the S&P, it's bolstered by academic evidence. I mean, we talk ad nauseum about Hendrick Bessembinder from University of Arizona, but I do think it bears repeating that it is absolutely staggering that over a century of US equity market returns, half of the created value was made by just 90 companies.

You know, why are you bothering with the tens of thousands of other ones? Try and focus on finding those 90. They're going to be, by definition, very different.

RN: It's a thought that in public markets I think is quite unusual, but in private markets it's really common that there are actually very few genuinely motivated, competent people in the world working on missions. They believe in. The most of the workforce are not primarily motivated by what they're making, that primarily motivated by plenty of other probably laudable goals around raising their families, being pillars of their community, and so forth.

But there is a shortage of genuinely fanatical talent and, sometimes you see that talent joined together in one company in an industry. I mean, we've been investors in SpaceX, for, what, 6 or 7 years now? That's an example. That's a phalanx of aerospace engineers who I would argue, you know, give us the lowest kind of key man risk possible.

They have inherited, Musk's dream. They've inherited Gwynne Shotwell’s way of thinking about how to get there. And they are marching to Mars. And that will change the world in a way that the 17th and 18th, enterprise software company to come along and deploy the same playbook out of a box is not going to, the exceptional is exceptional because it is rare.

PM: I'm curious what your sort of, almost rules of thumb for finding exceptional founders are, because I almost feel like if you leave a meeting, go. That was weird. That's a good sign.

RN: Possibly. I think actually, this is an area where public and private are very different. I think speaking as a private investor, it's really it seems really easy to underestimate how competent the average public market company is. The mere fact that it's in public markets shows that it can execute. And, I think the norm in public markets is to find a company that is competent, but has prioritised that competence to the point of losing the craziness of the next thing.

And so I see my public market colleagues sit down with company management teams and get really excited by a crazy vision, because that is as rare as hen's teeth in public market companies that have a track record of execution.

PM: Well, they haven't beaten out of them.

RN: Yeah, they have it beaten out of them by the endless meets and beat quarterly stuff. So to find a founder who is actually still in charge of his or her business in public markets and who's able to articulate where they want their business to go, is pretty cool. In private markets, it's actually flipped around on its head, like, we, we, we need so many people who are charismatic storytellers because you do not escape early-stage venture and get into the growth stage unless you are charismatic at storytelling.

These companies have normally never turned a profit. They have gotten to where they have gotten to because they were a, charismatic enough to raise other people's money and b, good enough to not take themselves out immediately. By the time we meet them, like grand visions are as common as anything. And the question is, is this actually a company that can operate?

Is this a company that's going to be able to go to the next stage? So for us it's actually the inverse. And, and what we get really excited about is when we find a team who are going after an absolutely enormous opportunity, but are also showing signs of having genuinely built a capability that can evolve the organization into that opportunity.

To your point, earlier, like beyond two years, it's candidly anyone's guess. But you can look at organisations, you can look at how those organisations handle information. You can look at how the leadership of those organisations interacts with that information. It's one thing having a founder who has a reality distortion field around them. It's another thing having a founder who's still capable of looking at the truth when it's unpleasant and driving the organisation in the direction it needs to be driven in.

And, and I would say some of our best founders have been the ones who have been in some ways, you know, not people you'd want to, go and have a drink with on the regular who who are obsessives who are unreasonably demanding of the people around them, and who probably have bad Glassdoor scores because they drive people to work harder than most people want to work.

But you combine that with an ability to look at the data of what's going on in their organisation, see where they're failing, and confront it rather than deceive themselves. And it's that mix of brutally unrealistic expectations of the outside world. But a white hot relationship with the failures of the reality therein. That kind of person can build an organisation, I think.

PM: I mean, that point around the types of people that you meet are very different. It's almost like the evolutionary pressures of VC select for charismatic founders, the evolutionary, pressures of being in the public markets, select for conformity and just delivering on a quarterly by quarterly basis beat and raising rates being beaten, raised. And I think that's carried out in terms of, you know, how we think about what risk is on the public markets because it's so rare to find these charismatic, visionary, driven founders or managers.

You know, the risk for our clients is that we don't invest in them.

RN: Yeah.

PM: So if when we see them, we have to try and be imaginative because the likelihood is that if they're successful, they're the ones that are going to drive the sort of ten, 20, 30 X returns. And if we don't own that, that is a blow to our customers, clients returns. And so when we're thinking about risk management, it's about managing the risk of omission.

You know, we have to be imaginative. We have to push ourselves to think, okay, it's very hard to do this psychologically because everybody's sort of pessimistic nature. Yeah. But if things go right for this company, how much could it be worth? Can I really push my assumptions here? And, you know, I think back to 2016 when I was looking at NVIDIA and I made a case that this could be a $500 billion company.

I was so uncomfortable and I made so many wild assumptions. Also, the case relied on the automotive segment, which has not come through nearly as much as anything else.

RN: There's also the period when it was sort of like, oh, it's Paulina. She'll say something about, I guess this is long before it was happening.

PM: Oh, she'll say, oh. The Bitcoin GPU drawdown doesn't matter. It's fine. Look I know you think I was right.

But it was I remember very distinctly just writing this case and going off 500 billion. That's really punchy. This is now a $4 trillion company. And the last time I said that it was a $3 trillion company. So things have moved on. But, you know, that's the way in which we think about risk on the public market side.

But I'm imagining that because the types of people you interact with are different, it's a bit more nuanced for you there as well. Gosh.

RN: It's another huge topic. Yeah. I think the biggest difference in the way we think about risk and the way our public colleagues think about risk is we don't have a chance to sell if it's really not working out. You mentioned earlier that that stat that in our best performing strategies, the best performing holdings pretty much universally have had multiple 30 per cent drawdowns along the way to being still in that the best performing holdings, what public teams can do is when you have that 30 per cent drawdown, think, is this a 30 per cent drawdown that's about to bounce back?

Let's add or is this a 100 per cent drawdown? Now's the time to sell. And I think you guys make that call pretty well most of the time. For us, when it starts not working, selling is normally not on the table because no one will buy. And so our forms of risk management, partly just thinking a bit more about how binary downside risk might be coming in.

I think that's a big difference between, a venture capital investment where if it doesn't work is a nothing. And the kinds of companies we invest in that almost always do have, genuine IP, existing customer relationships and a road to achieving profitability that maybe isn't fantastic but can still get us, 80 per cent plus of our initial investment.

But if not, then a slight to 2x profit. But the other way we think about it is in terms of how we engage with the company. And, that engagement can be as simple as just having candid conversations. We have, indicators that start flashing when we see that a business is running into the last two years of conservatively estimated cash runway left, and we start saying, look, you really need to start buckling in now.

It can be the next level up of making introductions, whether it's to, venture debt providers or operators we know have managed these problems before. And they're we're so lucky to have access to the Baillie Gifford public market, portfolio companies as well, because there's a sea of expertise there. And in the extreme, it means being in the boardroom and having some of the difficult conversations and, and those are really hard.

And you never forget the first time you're involved in whether it's, leadership change conversations, or in some cases, sort of liquidating the business to redeem some part of the value. But you do have to roll up your sleeves and, that's very different, I think, from public markets, I think downside risk means something different to a public market investor who can sell and wash their hands and be clean.

And I have about for these reasons, I'm not going to go into the details, but, you know, I've had, there was a guy who was he was the same age as my dad, like, begging me not to make him fire a thousand people. And that's a different kind of downside risk when you experience it.

And it maybe makes you a bit less blasé about it. Going in. So it's a different it's a different risk set. The thing that we do think redeems private markets as a place for a risk return for our clients is whilst we do have just as an asset class, a much higher rates of go-to-zeros, the upside tail is so much fatter than the upside tail of returns public markets. I mean you mentioned the 90 public companies that have mattered. When we look at the data like our odds of finding a runaway 5 to 25 times Lollapalooza winner are so much better.

PM: Oh, I work in the wrong markets.

RN: And so the thing we have to do is, it's one thing to understand that risk and to try and say, is this a business that has multiple options open to it? It's another thing to get obsessed by that risk. And only invest in boring companies that are growing at 30 per cent with a 10 per cent margin.

PM: I mean, I imagine those are quite efficiently priced anyway. You're not going to be.

RN: That's the thing. Yeah, most of our peers price for a three times return. And obviously if we believed inefficient markets would be in a different line of work. But I do think the most efficient, price thing in private markets is the solid three X returner over a 6 to 7 year period. And so we ask a similar question, to, to what you guys ask of like, do we have, over baseline odds of a five times, an eight times, a ten times return here?

And then on the downside risk, it's more do we think this has a less than baseline chance of being a go to 0 or -50 per cent. And if we can skew the downside curve that way and we can skew the upside curve that way. And we build a portfolio of those names then, then we're pretty confident we'll be able to deliver good returns of clients.

PM: I mean, that what you were talking about there, in terms of the getting involved almost at an operational level, as far as I'm aware, most of the folks on the private companies team come from a public markets background. At least the ones who started at Baillie Gifford certainly do. So those are entirely new skills that you have had to learn and develop over time.

I'm curious about how you did that, because when I think back to, you know, the number of occasions where we on the public market side were involved in a deeper way in a company, they're quite rare. I struggled to name more than five, to be honest, and that tends to be in cases when, say, an activist comes along and wants to change something dramatically at a company.

And we feel that actually the opportunity is still big enough that we should do something about that. Obviously, this is much more common that you have to get that involved in private markets, though.

RN: Yeah, I think it's partly been a school of hard knocks. We, you know, if I look back to 2015, like we were a group of people who had, Baillie Gifford only public markets experience. In my case, I had the brief experience of repeatedly trying and failing to be a fan of myself, but in no way comparable to the kind of founders we get to work with now.

So it's a really no experience worth noting. And, and it's been a, it's been a story of, of ten years of, of being put into those situations. And I think we were very lucky as a team because we had a number of more senior investors at Baillie Gifford as mentors. You had been in more of those situations.

I mean, several of our public market investors sit on boards and have had that experience. And I think we were also lucky at getting really good mentorship and support from some of the management teams we were fortunate to work with. And, but it's at the end of the day, there's no substitute for experience in this world.

You can't learn things from a book. And we're still, we still as a team, mostly people who Baillie Gifford has hired as investors, who have ventures and specialise. So it's a bit different from the typical public team in that we don't have as much liquidity, if you like, in our investor pool, we're not rotating our investors between private and public in a high level.

We take people and then we try and train them up and keep them. And it takes, I would argue, two years to retrain a public market investor into being, a private market investor. But we've actually found the kind of, curious, driven, hard-working, first principles thinker that the Baillie Gifford grad scheme hires for is a really good match for our asset class, and they need to be given different tools.

They need to be given mentorship. And we do have on the investment committee. And Chris Everman, who has 20 plus years of experience running venture capital funds in China and in and in the US. And he's been a mentor to myself to Peter. He's the head of the team, but also to the whole team, to be honest.

And teaching us those extra skills of the trade. But I people learn, people learn. You just throw them in the deep end and then they us through. And I think by now we do have that experience baked into the team. I mean, the first few years, definitely. We were we were looking back at sometimes just getting it really wrong.

But, at the end of the day, we were we were super privileged because the brand the Baillie Gifford has amongst high growth companies globally, which is a brand that has been built by our public market teams. Being thoughtful partners meant that we had a great start because we were beginning with access to the best private companies.

And then, the companies we got to work with were exceptional, and they showed us what exceptional looked like. And you combine that with an organization that's constantly telling us to be humble, in how we relate to these companies, to never kid ourselves, that the key cause of success is the investor, to seek out these founders who are doing, I think it's the hardest job on earth.

I mean, I'll hear arguments for single motherhood as well, but I do think organizing these huge organizations to go after something new and staying aggressive and risk taking and driving other people to be that way when it's your entire net worth is is a psychological balancing act. We understand that as an organization, and I think that really helped us get it right and avoid some of the the, dare I say, like tech arrogance that maybe you get elsewhere.

I think I think we, we set out from the beginning to try and enable the best companies globally to scale, believing that by doing so we would we would generate great returns for our clients.

PM: I think as we wrap up, I mean, it just strikes me that there is definitely more similarities and differences between the private and public side of things. There's technical differences, and I think in terms of how you think about risk, for example. But in general terms, we're all trying to achieve the same thing, which is pick the very best companies and hold them for long enough for that to to matter.

And ideally as long as long as we possibly can, at least until we feel that they are valued appropriately by the market. At which point we can we can let them go. And there's just.

RN: A lovely way of putting it as well. I think so often when people talk about setting and sell discipline, the there's, there's an almost an inherent sense here, but it's actually we're trying to find companies that are underappreciated by society. And the time will come, we believe, when they are appropriately appreciated for the extraordinary businesses they are.

PM: I think people will hear self-discipline and they think, oh, it's because something's gone wrong. Yeah. And in an ideal world, no, it's because everything's gone right.

RN: It's a mutual victory celebration. And you can send an email saying, we've we've just exited our position. And we'd like to buy you a bottle of champagne. But probably gifting rules mean that we have to keep it underneath whiskey.

PM: We could give them whiskey.

RN: There's a nice whiskey for 45 pounds. That is a great gift for those reasons.

PM: But I guess the the final thought I had. And then I'll turn it over for you to, to comment on it was around the benefits that you get from being integrated as a public and private house, and the information flow, the access to the brand, benefits that you get that you can leverage when you're looking for these types of companies.

These are all things that really matter. And it almost makes you wonder why nobody else does it in quite this way.

RN: Yeah. Gosh. I mean, I can't speak for that. I also think a couple of other people who are starting on or have been doing it, I think, Fidelity has been doing this T Rowe Price, getting back into the game now, and, and there'll be others I'm not thinking of. Certainly, analytically, though, I think that's probably the thing I've undersold that, you know, there's 130 growth investors, Baillie Gifford, and they're looking at all of these sectors and all of these countries caring about the growth pieces.

And, it's through, network of people on the public market teams. We sit down once a quarter and we get to hear what the public market teams are seeing and thinking about their sales, their buys, their research agendas. That meeting that lunch, whilst fun in itself, is also. That's all radar. I mean, there's no way that with a, concentrated private companies effort like ours, you could effectively cover global without having 130 public market investors who will all in their own way, acting as scouts for the big trends and themes.

And, that lets us do the lift that we do. But I think we only get that because of the decision that Baillie Gifford made to not put a, firewall between the private effort and the public effort and the, that one in all in policy has been critical, I think, to our ability to do this at all.

Well, and then maybe that's been a reason that the other public players have been put off. Or maybe it comes back to the brand point. Maybe it comes back to the way Baillie Gifford invests in growth companies means that the brand is clear, whereas perhaps some of our peers also do shorter-term volatility management strategies, which I think is totally honourable kind of investing.

Don't get me wrong, but it's a very different kind of investing from the kind of investing our public teams do. And it's so happens that this whole asset class is highly synergistic with the particular kind of public investing that you guys do.

PM: I think I think it does come down to the one in all in policy and just the type of analysis that we're doing on a day-to-day basis.

RN: Yeah. 

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