Investment in closely held technology companies is set to keep rising after hitting a record last year, as more funds that have traditionally invested in public markets chase the lofty returns being generated by startups, according to a new report.
A survey of 95 institutional and public equities investors by data firm PitchBook showed that 59% plan to “significantly increase” or “slightly increase” their allocations of capital to private market companies over the next five years. Just 6% planned to trim them.
The survey, conducted in June, comes after investment in private technology companies globally hit a record $274 billion last year with help from institutional and public market investors, PitchBook said in the report released Friday.
That record marks a 57% increase from 2017, the previous high of $174 billion, buoyed by the proliferation of new venture firms and corporations investing in startups as well as public market investors crossing over into the private market. As of June, private companies with venture capital backing had raised $107 billion for the year.
A spate of recent initial public offerings by tech companies has highlighted the blurring of the conventional line between startups and listed companies. Historically, companies went public much sooner after being founded, enabling public-market investors to reap enormous value after the IPO.
But increasingly, tech companies create more value for investors while they are private than they do in the public markets. Investors who put money into ride-hailing firm Lyft Inc. while it was private, for example, watched the company’s valuation rise to about $15 billion over eight years from about $6 million. After reaching a $24 billion valuation in its March IPO, Lyft’s stock price has gyrated, and the market capitalization is now at about $19 billion.
“The biggest thing is, if you wait until a company goes public, a lot of that growth has already been had,” said Nizar Tarhuni, director of research and analysis at PitchBook and one of the authors of the report. “Investors are really not distinguishing between public and private companies. This is a lasting and a structural shift in the capital markets that we will see for a long time.”
Asset managers, mutual funds and family offices have flocked to the private technology market, funneling more money directly to high-growth companies such as Palantir Technologies, Airbnb Inc. and WeWork Cos., and into the venture-capital and private-equity funds that back startups.
By the end of last year, a record 13,695 companies were backed by late-stage venture or private-equity firms, according to the PitchBook report, even as the number of public companies shrank.
The flood of capital into startups in recent years and the soaring valuations of many companies before they are exposed to the rigors of public markets have fueled concerns that the startup boom is a bubble. But low interest rates and government bonds with negative yield rates have continued to push investors to look for such tech deals.
Venture-capital and private-equity firms have about $3.3 trillion in assets under management—nearly 50% more than a decade ago—and that includes $1.1 trillion in unallocated cash, known as “dry powder,” ready to be spent, according to PitchBook.
Baillie Gifford, an international investment manager based in Edinburgh with more than $250 billion under management, adopted a strategy of investing in private tech companies in late 2014, after reaping a healthy return from an investment in China’s Alibaba Group Holding Ltd. while that company was still private. Since then, the firm has invested approximately $3.5 billion of its clients’ money across about 60 venture-backed private companies.
“At a high level, we really want to be agnostic whether a company is private or public,” said Peter Singlehurst, head of unlisted equities at Baillie Gifford.
In some cases, institutional investors are lumping private and public technology companies together in the same funds. Fidelity Investments has been among the most active backers of startups valued at $1 billion or more, and its well-known Contrafund and Blue Chip Growth Fund have holdings in private tech companies including WeWork, SpaceX Exploration Technologies Co. and Juul Labs Inc., among others. The investments can be in the hundreds of millions of dollars but account for just a fraction of a percent of the fund.
Fidelity has written down the value of some of its private company holdings, including software maker Cloudera and, before they went public, Dropbox Inc. and Snap Inc. In 2015, Fidelity invested in human-resources software startup Zenefits. A year later, that company slashed its valuation by more than half after a spate of scandals.
Some are choosing to sit out the startup rush. Jordan Stuart of Federated Investors said some investors aren’t appropriately calculating their risks of dabbling in the unpredictable startup business. Even at later stages, startups fail. And since a startup investment isn’t liquid, investors can’t quickly sell if things start looking bad.