There has been quite the buzz about investment trusts buying unlisted companies in recent years. Scottish Mortgage Investment Trust (SMT) may now be the best-known cheerleader for investing in private companies, but plenty of others make a compelling case. Chrysalis Investments (CHRY) continues to do well from buying pre-IPO stocks, Schroder UK Public Private Trust (SUPP) recently clocked up quite the win via the flotation of Woodford-era holding Oxford Nanopore (ONT), and the private equity sector has delivered notably strong gains.
A recent paper released by private equity specialist Pantheon reminds us of the premise behind an allocation to unlisted stocks. Public markets are shrinking for a variety of reasons and the paper notes that the number of listed companies has declined by some 2.2 per cent a year over the past decade. Separately, the number of companies held privately has grown by 5.7 per cent a year. With many exciting companies staying private for longer, good investments can sometimes be found off the beaten track.
So far, so good. But it’s worth remembering that plenty of equity investment trusts still stick with just the public markets, probably for good reason. Some teams may lack the relevant expertise or resources. Some may note the difficulties of selling a stake in an unlisted company if things go wrong. Others are content with what’s available in the listed space.
Tech, in particular, is one sector where companies can stay private for longer, potentially depriving those who stick to public markets of juicy returns. But not all sector specialists are caught up in the clamour for unlisted stocks. Walter Price, of the Allianz Technology Trust (ATT), recently outlined some interesting counterpoints at a media event.
He, for one, worries about the difficulty of extricating oneself from a position in private holdings if things don’t work out - something partly demonstrated by the Woodford affair. He also suggested that the effort involved in establishing such positions in the first place might not always pay off: Price noted one case where a peer spent a good amount of time establishing unlisted positions in Facebook (US:FB) back in the days when it wasn’t a listed entity. While that investment was “probably a good call”, Price notes that the social media giant’s shares were down by some 50 per cent six months on from their flotation – offering opportunities to investors in the public markets, without any liquidity headaches.
Interestingly, Price also cites other trends that may help to offset the woes of a shrinking public market. The rise of the special purpose acquisition company (Spac) means, in his words, that businesses can now go public “when they’re ideas”. That and a spate of direct listings could mean listed equity investors have less risk of missing out for the time being.
As with any fear of missing out, we should of course ask if participating in a trend is a good thing. The likes of Spacs can come with big risks and disappointing performance, as can unlisted companies. The level of risk/reward can be pretty high, and we as investors should seek to back fund managers who have the relevant resources and expertise. As with any exciting new asset, watch out for investment managers who appear to jump into Spacs, unlisted stocks, or whatever the next trend is, without appearing to be properly equipped.
