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The case against investment trusts buying private companies

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.

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