Fund managers are increasingly disregarding the distinction between publicly listed stock and private equity, in part because of the tendency of firms to stay private for longer. Capital in private markets has grown remarkably, while capital requirements from private companies are more than satisfied without needing to access public markets. 
The traditional route to access capital in capital markets is not necessarily via an early IPO anymore. One study by University of Florida study showed that whereas in the height of the tech bubble in 1999, companies stayed private for four years, the average age of a technology company before it went public in 2014 was eleven years. A combination of more capital available to invest in private companies, legal changes around the maximum number of shareholders allowable at an unlisted company in the US and less demand to take the IPO route from early investors and employees are amongst the reasons for the change. The IPO route also comes with a host of risks including risk of being acquired, activist investor involvement and the initial costs of listing.
The trend is particularly true of the US and China markets, with large, capital‐light technology and consumer‐facing companies as the best examples. The list of ‘unicorns’, i.e. start‐up companies valued at over $1bn, has nearly 300 names, and is topped by the likes of Uber, Xiaomi, AirBnB, WeWork, Pinterest and Lyft, to name a few.
For managers who can invest in companies prior to IPO, and possibly continue to hold the stock once listed, private equity provides potentially greater long‐term return potential. Owning higher growth companies at the very earliest stages certainly has its risks, but the potential to find the next Amazon or Alibaba is the ultimate prize.
Moving on to the average retail investor, the landscape has also continued to change. Baillie Gifford launched their first investment trust in over 30 years, the Baillie Gifford US Growth Trust. The vehicle specifically targets both listed stocks and private holdings, with the aim of growing the private element over time to a meaningful percentage. We have also seen the Old Mutual small- and mid-cap team allocating a small percentage of their open‐ended funds to two unlisted investments.
This is certainly not an entirely new trend. Neil Woodford is perhaps the best‐known advocate of mixing listed and unlisted stock within his main retail fund, albeit with somewhat mixed results since setting up his own firm.
Private equity exposure itself is not new, as listed private equity strategies have been accessible on the London Stock Exchange since at least the 1990s. These are vehicles investing solely in private equity, either via underlying fund‐of‐funds, or in some cases direct unlisted companies. However, these have not crossed the line into listed equities, per se. The first to cross the public/private equity divide have been the more traditional listed equity managers crossing into the private equity space. Given the lack of liquidity in unlisted assets, the investment trust arena is perhaps best placed to combine the two most effectively. Indeed, there are a number of options. We have mentioned the newly launched Baillie Gifford US Growth Trust, but Baillie Gifford already has a fairly long history of investing in unlisted companies within Scottish Mortgage for example. At present unlisted companies account for 13 per cent of the trust, with AirBnB (recently gone to IPO), Dropbox and biotech company Grail being amongst the largest holdings.
RIT Capital Partners is another trust with a significant unlisted exposure of around 9 per cent in direct holdings and a further 13 per cent in private equity funds. Again, Dropbox is among the names held. RIT has a broader investment remit than other equity funds mentioned above, also investing in hedge funds, absolute return and credit funds alongside traditional long‐only equity.
The increasing time companies are remaining in private hands is a trend that we believe will continue, and the ability to access investments at earlier stages within a broader portfolio is certainly an interesting development as the line between public and private equity become increasingly blurred.
Today the two Baillie Gifford trusts and RIT capital Partners are, in our view, amongst the best ways to fully access the opportunity, and an interesting opportunity for a diversified investor.
Nick Wood is head of fund research at Quilter Cheviot. The views expressed above are his own and should not be taken as investment advice.