It’s encouraging to see things like PICSES, a new market for private companies from the London Stock Exchange Group, to be launched. I see this as “step one” in what is a likely 20-50 year journey where the barriers to ordinary people owning privately held companies come down.
Why does this matter? It matters because companies are increasingly choosing to stay private longer. Successful companies you’ve heard of - like OpenAI, SpaceX, Revolut, ByteDance (TikTok) and some you’ve likely not, but are massive $bn businesses, like Databricks.
Alongside this story, however, come the “misery merchants” peddling “private markets are a scam!” “It only helps make the private equity bosses rich!”. Like with most things in life, there is some truth to these comments, but equally some are just plain dumb.
To illustrate two ends of the spectrum with actual facts:
Hargreaves Lansdown just announced it was going into Private Markets with an LTAF fund from Schroders, a UK asset manager. One sharp FT reader pointed out that the fund had the following characteristics:
“The Schroders Private Equity LTAF has returned 4% total over the past year (at least holding steady with a bank account at a high street bank) and charges 3.2% management fee. Net return 0.8%. If you don't like this, and want out, the redemption fee is 5%. Like St James Place, if you are smart enough to realise it's a scam you'll be fleeced on the way out. Way to go, Schroders. Time to go public and take it to the masses guys!” (source: FT)
Now, that may be enough to put you off private markets! For me personally however, as a long term investor in 3i, a (British!) private equity firm, the story is very different - powered by one amazing company, discount retailer Action, 3i has returned 670% since 2015^, 10x the performance of the FTSE100 in the same period at 62.7% total return*.
3i is just one example, but the idea that privately held companies are a “scam” or only make money for PE executives is as wrong as the salesmen in the private markets describing “outperformance” using very selective data sets.
What is ultimately important, is proper due diligence and understanding what your money is going to be invested in. No one knows the future, for every 3i, I personally have investments that have not done so well, but what I can say is that one can observe many things before making an investment that will help reduce your potential risk or at least understand your risk. Learn more about how we think at Prosper today.
Capital at risk. Private market investments are a high-risk investment. Don’t invest unless you’re prepared to lose all the money you invest.
This article was originally published on LinkedIn.