Beat the crowds to invest in SpaceX

An IPO would also be the first opportunity for retail investors to gain direct exposure to the SpaceX story. It’s a reminder that the man in the street is often the last one invited to the party when it comes to fast growing companies; most people don’t get a chance to invest in businesses until they move from private to public ownership, by which time their most rewarding growth years may be behind them.

Still, not everyone has missed out on SpaceX. If you’re an investor in one of four investment trusts managed by Baillie Gifford, you’ve already benefitted from its success. The largest of these trusts, Scottish Mortgage, invested $200m in SpaceX in 2018; that stake is now worth around $3.3billion.

In fact, investment trusts can be an excellent way to get early exposure to attractive private companies. Their closed-ended structure is well suited to investments that are illiquid, since investment trust shareholders can buy or sell shares in the trust on the stock market at any time, and the manager does not have to sell any assets to meet withdrawals.

Indeed, investment trusts have a long track record of ensuring retail investors don’t miss out on the best private companies. Recent high-profile examples include funds’ holdings in companies ranging from Airbnb to Klarna, and from Oxford Nanopore to Starling Bank. And with many companies now choosing to remain private for longer, the ability of investment trusts to offer such exposure is becoming ever more valuable.

There are plenty of different options for interested investors to consider. First, a growing number of generalist investment trusts are following the Baillie Gifford example and increasing their holdings in private businesses. These sit in their portfolios alongside shares in listed companies. The fund will sometimes set a cap on the percentage of the total portfolio such private companies can account for.

In the Growth Capital sector, investment trusts are largely invested in privately owned companies at a later stage in their growth cycle – and are therefore more likely to be considering an IPO. The trusts take minority stakes in these businesses, often investing alongside venture capital firms.

Alternatively, you could look at the Private Equity sector, where funds are invested in a variety of private companies, from mega buyouts to venture capital. Venture capital trusts, meanwhile, invest in very early-stage and small-scale companies, offering tax reliefs as well as long-term growth and income potential.

Naturally, all funds have a different risk and reward profile. For example, the listed holdings in generalist investment trusts can offer some protection from the problems associated with investing in private businesses, such as illiquidity and valuation uncertainty. Larger and more mature private businesses tend to be less volatile than their early-stage counterparts.

Such comparisons should be part of your thinking if you’re considering trusts that look beyond the stock market for portfolio holdings. What’s undoubtedly true is that investment trusts are one of very few ways for retail investors to benefit from holdings in private companies that have traditionally been the preserve of professional or institutional investors.