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The artificial barriers between private and public companies are disappearing, but the investment world has not kept up. Investment managers Tom Slater, Chris Evdaimon, Peter Singlehurst and Rob Natzler discuss Baillie Gifford’s refreshing approach to investing in late-stage private companies in the Private Companies Overview film.
Before, staying private wasn’t an option. The need for capital drove companies to go public at a certain stage in their development in order to grow their businesses. But over the past decade there has been a profound change in how, where and when companies capitalise. Technology has made it easier for companies to grow rapidly, with very limited requirements for capital, making it possible for them to stay private for longer.
Tom Slater has watched this shift unfold, “Back in 2012, it was clear that if we were going to retain access to the most exciting growth opportunities in the world, we must invest in private companies. Today, Baillie Gifford has about $5bn of assets invested in private companies, and around $40bn of assets invested in companies that we first invested in when they were private.”
Businesses are delaying going public partly as a result of regulatory changes, but there are other softer cultural factors pushing companies to remain private. Peter Singlehurst highlights “a real cultural shift among founders in the perceptions of staying private versus being public.” It goes beyond distancing themselves from the short-term pressures of the public markets, to recognising that “they derive competitive advantage from remaining private, by being able to focus on the core mission of their business.”
Singlehurst is aware of the implications for clients wanting to stay on the right side of the change. “As these companies stay private longer, it means that there is a change in where value accrues. More value is accruing while companies are private, and less value is accruing while they’re public.”
The traditional model of investing in private companies is increasingly misaligned. Baillie Gifford seeks to correct this by using fund structures that permit longer holding periods. “We aim to provide that continuity of ownership by investing in them privately, owning them into the public markets and owning them for as long as we believe the upside remains,” says Singlehurst.
And Baillie Gifford’s method works, according to Chris Evdaimon, because, “We work hard to earn the trust and the respect of the entrepreneurs that we back, through demonstrating our understanding of their companies, sharing our learnings from their sector, and by helping them transition to a public company for the right reasons and at the right time. They know that Baillie Gifford is likely to be a buyer and then remain a patient shareholder for the long term.”
He confirms that in the past couple of years, more than 70 per cent of the investment rounds that we closed were directly solicited by the companies, and very often through referrals from within the Baillie Gifford portfolio. On average, we receive our required allocation in more than nine out of ten investment cases.
Companies in the later stages of the private markets need long-term owners and stewards of their businesses. They want a partner that can provide both additional capital as they transition into the public markets, and that stability of ownership and guidance as they navigate what can be a tumultuous process.
Rob Natzler explains our investors add value, “in the conversations that we have, reminding them of the importance of the long-term strategic objectives, rather than obsessing unnecessarily about possible short-term tactical missteps.”
Communicating that ambition and willingness to embrace uncertainty means that when these companies go public, founders often reach out for advice. Here Baillie Gifford can assist companies in their thinking about corporate governance issues, from share class structures to putting in place modern slavery policies. Andrew Cave, Head of Governance and Sustainability at Baillie Gifford, frequently runs workshops with founders and their teams, supported by a dedicated Governance and Sustainability Team.
Natzler comments, “It’s very rare to find an investor who can be with a company through multiple stages in private markets, then there’s that willingness to be with them for the long term in public markets. By being that investor, Baillie Gifford can reliably show that it is better aligned with the interests of the company than anyone brought in to give short-term advice around the time of an IPO.”
Slater closes by assuring all that Baillie Gifford’s way of investing in private companies is very similar to how we’ve invested in public companies for more than 100 years: focusing on long-term winners, while being loyal and supportive shareholders. He says, “What excites me most about our private company investments is the opportunity to invest in world class companies that we think can drive growth and returns over very long periods of time.”
You can hear more of our investors’ views on private company investing in the Baillie Gifford film Private Companies Overview.
IMPORTANT INFORMATION AND RISK FACTORS
The views expressed in this article are those of the authors and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in December 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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