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If you can’t beat ’em – the secret of late-stage private equity

The quantum of US companies has halved since 1996, which plays into the hands of late stage venture gurus.
Investing 101

Where have all the companies gone?

Christian Munafo, chief investment officer at Liberty Street Advisors, knows where.

“The number of companies listed on US stock exchanges has virtually been cut in half in the past couple of decades,” Munafo (pictured) said at a recent The Inside Network Alternatives Symposium. “So, the ability to generate alpha in US listed opportunities has essentially been cut in half with it.”

  • There were about 8,000 listed companies in the US in 1996. That figure is now 4,000.

    It’s not so much that there is a company graveyard somewhere in the US, where, like aircraft in the Arizona desert, the 4,000-odd companies are stored. Munafo’s statistic is based more on the dwindling supply of companies to the US stock market.

    “In parallel with the decline of the public-company population, the number of private companies has surged. And for one simple reason – that private companies, these days, stay private for longer. So, there are less private companies that want to ‘go public,’ and they also stay private for longer,” he said.

    “When you think about the venture, technology, innovation, disruption segment of the private market, and the markets in general, you think of names like Amazon, Oracle and Microsoft and so on,” Munafo continued. “These companies, historically, went public typically within three to four years from their inception. If you look back to the late 1990s as an example, your average venture-backed company went public at around a US$500 million valuation, three to four years into its existence.”

    But fast-forward to today, these same businesses are staying private now for 12 years – and in some cases 15 and 20 years. “By the time they tap the public markets, if they decide to do that, and do not get acquired in advance of that, you’re seeing them go out at much more significant valuations, as billion-dollar-plus market-cap companies,” said Munafo. “They’re able to grow into much larger businesses, inside the private market.”

    There are several reasons for this, he said. “Partly, this is caused by regulatory changes, which make becoming a public company unattractive to a lot of business owners. A lot of private companies simply do not want to deal with the administrative burden of being a public company. It’s not only a regulatory burden, it’s costly, so if you can avoid doing it, you’ll probably do that for as long as you can.

    “Secondly, if you’re a high-growth business, growing 50 per cent to 100 per cent plus per year, the last thing on your mind is most likely wanting to be held accountable for quarterly earnings estimates.

    “Third, when you’re trying to disrupt an industry you don’t want to be held hostage to public-market psychological volatility. So, a lot of companies have also decided to stay private for longer, for those reasons.”

    But an even bigger reason, he said, was the “tsunami of capital” that is available for unlisted companies to tap.

    “The amount of capital available to these private businesses has just absolutely surged over the last couple of decades. Roughly US$1.5 trillion has been made available, just looking at US-backed companies, over the past decade or so, which has allowed these companies to continue growing, innovating and disrupting, developing their business models, while staying private,” Munafo said. “And while we’ve definitely seen a slowdown in the amount of capital that’s been invested year-to-date, for obvious reasons, you’re still seeing a very large amount of volume in terms of numbers of deals that are being funded.”

    Where Liberty Street Advisors comes into the picture, he said, is that these trends create “a massive opportunity” for investors. Liberty Street Advisors specialises in providing its clients with access to “late-stage venture capital and growth-oriented investments” — a market segment that Munafo defined as privately-owned companies that have products in the marketplace, and strong sales growth.

    “We define that as companies that are generating typically a minimum revenue of US$50 million—$100 million, typically growing at a rate of 40 per cent to 50 per cent,” he said. “These aren’t the early-stage seed ideas that are coming out of a garage, these are real businesses that are staying private for longer, and growing into much larger operating businesses in the private market. They may be headed for an IPO, or they may be headed for a trade sale, but there will be a liquidity event eventually that will provide us with an exit.”

    The Liberty Street Advisors strategy is open to Australian advised investors through a strategic partnership with GAM Investment Management. The Australian vehicle feeds into Liberty Street’s Private Shares Fund, which at 30 June 2022 had earned 11 per cent a year over its roughly nine-year history, versus 6 per cent for the Russell 2000 index of the share market.

    James Dunn

    James is an experienced senior journalist and host of The Inside Network's industry events.

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