Why are private company investments growing in popularity?

Investing in private companies is less talked about than investing in listed instruments. But they have many advantages (and not just higher potential returns). Andrey Berezin (Raison Asset Management) - What is interesting about pre-IPO investments?

Last year, many investors came to the US stock market. The stock market fell rapidly, then grew no less rapidly; the shares of the electric car manufacturer Tesla rose tenfold, and the shares of the cruise company Carnival fell 2.5 times. Almost everyone started talking about "the stock market game." Venture capital investments, i.e., investments in private companies, received less public attention. However, they continued to grow in popularity and market share.

Fact: the private market is more important than the public one. For example, in 2017, Morgan Stanley analysts indicated that the volume of transactions in private companies amounted to $3 trillion, and the volume of exchange transactions amounted to $1.5 trillion.

Twenty years ago, the situation was reversed: venture funds specialized mainly in private equity investments in non-public companies. Insurance companies, banks, pension funds, and individual investors preferred to buy shares on the stock exchange. However, over the past twenty years, everything has changed - private equity investments have become increasingly popular. According to McKinsey & Company, the volume of private equity investments has increased eightfold since 2000, while the stock market's capitalization has increased only threefold.

The number of investment funds specializing in private equity has also grown. Ten years ago, they managed $1.6 trillion in assets; today, this figure has risen to $4.5 trillion. Deloitte analysts predict that this figure will reach $5.8 trillion by 2025.

Investment in private equity is becoming more widespread. Last year, 66% of institutional investors - pension funds, insurance companies, banks, etc. - held private company shares in their portfolios. In addition, more than a third of institutions planned to increase their investments.

Retail investors' demand for private companies is also growing. Over the past two years, the number of pre-IPO queries to Google has increased by 600% worldwide.

So why is investing in private companies growing in popularity?

Investors are seeking higher returns.

Shares in private companies offer better returns than the public market. Analysts at Cambridge Associates have calculated that private equity investments outperform the major market indices in profitability.

These are average figures, and investors earn the most from the shares of private technology companies, i.e. companies in IT, fintech, biotech, e-commerce, etc. For example, in March 2018, shares of restaurant delivery service DoorDash cost $5.50 each. The company went public late last year, and today its shares are trading at $136. When the company was private, investors who bought DoorDash shares two years ago would have made 2,370% today. Read the full article on the pro.rbc website.