Private Growth Equity: A $5 Trillion Investment Opportunity
This is symptomatic of the seismic shift that has occurred in the evolving landscape of growth investing. Traditionally, companies with more than $500 million market value would go public, allowing many types of investors to participate in their journey to a hundred-billion-dollar valuations.
Today, this growth journey has become largely inaccessible to public market investors as companies are opting to stay private for longer.
This shift has created a growing asset class of over 1,500 private companies valued above $1 billion, with a combined market value exceeding Dollar 5 trillion.
Overlooking an Asset Class Overlooking an Asset Class
Private growth equity has been largely overlooked by investors in favour of traditional buyout or venture capital investing. This has led to the neglect of an asset class that has outperformed all others since 2010.
Why is this?
Investors often overlook the possibility that exponential growth can continue long after companies grow larger and less risky. Generally, the human brain underestimates the power of exponential growth.
If you could fold a piece of paper 42 times, it would be thick enough to reach the moon. Private companies growing revenue consistently by 30 percent per year can deliver the same wonder.
Another criticism is that private growth must be a bubble, with such big companies. But this idea misses the breadth of opportunities.
On the one hand, certain companies are large. But this reflects the size evolution of public companies over the last 20 years.
In 2004, the largest company in the world – General Electric – had a market value of $380 billion. Today, the largest company in the world – Nvidia – has a market value of over $4 trillion.
Choosing Shareholders
Staying private for longer means private companies can carefully select shareholders who have a time horizon to support their future growth, and experience of owning companies while they scale.
Having aligned shareholders allows management to make bolder, longer-term investments in their businesses. For example, they can more easily forego short-term revenue to focus on something bigger, like SpaceX loading rockets with their own Starlink satellites instead of offering launch capacity to paying customers.
Lower Loss Rate
By the time a startup becomes a private growth company, it has overcome three big hurdles that lead to startup failure: product market fit, having the right team, and nearing profitability. Since 1987, only one in three private growth companies has returned less than the initial investment. For earlier venture capital, it is two in three companies.
Private growth companies have also demonstrated their ability to endure the intense market challenges of Covid in 2020, followed by the rate-hiking cycle of 2022, emerging leaner and more strategic.
Reaching a Trillion
The prospects are exciting. Take SpaceX for example, a private company valued at over $350 billion that can connect anyone in the world to the internet through its 7,000 Starlink satellites, with hundreds of billions of dollars of revenue potential.
Or Databricks, with a market value of $62 billion, which is becoming the cloud data solution of choice in an AI-enabled world. Or ByteDance, owner of TikTok, is valued at $3-400 billion despite generating similar revenue to Meta and growing faster.
Each could approach a $1 trillion market valuation – and generate exponential returns for investors. Investing in these companies requires a long-term time horizon. But it should be a worthwhile opportunity.
Baillie Gifford Investment Management (Europe) is authorised by the Central Bank of Ireland.
