Originally published on Inside Adviser on Wednesday 5th of October, 2022.

Many investors in the share market might not know it, but their investment world is rapidly changing before their very eyes. The number of listed companies, always only a tiny fraction of all companies, is contracting.

Over the past 25 years, the number of publicly listed companies in the US alone has halved from 8,000 to 4,000 – and it’s a global trend. Looking through a different prism, in 2014 there were 42 late-stage venture companies worth more than $US1 billion in the US. Today there are more than 1,000, a massive increase.

It’s not just an issue of fewer companies wanting to list. It’s also the fact that many companies are deciding to stay private for longer. They have decided the regulatory demands are too onerous and costly and that their high-growth strategies can alienate shareholders focused on earnings and dividends.

It also reflects the reality that the opportunities for private companies to raise capital are more varied so the need to go public to fund early-stage development is not nearly as pressing.

On the other side of the coin, there is no shortage of capital wanting to invest in these established private pre-IPO companies. As is often the case in investment trends, the US market is a bellwether of what is happening with an estimated $US1.5 trillion invested in these companies in the past decade. It has allowed these companies to grow, innovate, and disrupt without having to be concerned about the burdens that come with being publicly listed.

What are the advantages for companies that stay private and delay their IPO?

There are other advantages too. For the founders of these private companies, it gives them more options. For example, having access to a trading platform and other sources of capital relieves the pressure to have a premature IPO. It also allows shareholders to trade their shares. And, having a wider spread of sophisticated shareholders increases the chances of having a successful IPO when the decision to go public is made.

What we are seeing is a perfect storm: companies wanting to stay private longer are finding myriad avenues to raise capital outside the traditional IPO route. At the same time investors are more aware of and attracted to the investment opportunities these companies offer.

Increasing investor interest is the fact many of these companies are in those investment sweet spots – the industry sectors of tomorrow such as fintech, healthcare, education, security, cloud technology, genomics, and biotechnology.

As investing in private companies moves increasingly into the mainstream, there is one constant with investing in publicly listed companies – the need for due diligence. While pre-IPO buying opportunities are prized because they tend to be attractively priced, they also come with less liquidity and transparency than a publicly listed company. The phrase, ‘high risk, high reward’, is merited. So, with such investments, investors need to be prepared to do their research. This cannot be stressed enough.

How do you decide if a company is right for investing in?

One approach is to use a combination of qualitative and quantitative analysis – known as a top-down and bottom-up approach – to distinguish companies worth pursuing and those to set aside. When engaging in fundamental analysis, examine:

  • Quality of management
  • Experience and strength of investors
  • Quality of the business and operating model
  • Market opportunity
  • Competitive landscape
  • Capital structure
  • Path to profitability if not yet profitable

This list is far from exhaustive. If physically possible you can visit the company. How are they spending your money – or potential money? Is the car park populated with Ferraris or Toyotas? The latter is preferable. Doing your homework and seeking professional advice, if necessary, is critical.

Explore our latest private market opportunities here.

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