Choose investment trusts to access private companies

Where did all the publicly-listed companies go? By the end of last year, there were 1,681 companies listed on UK stock exchanges, down almost a third compared to ten years ago. It’s a similar story elsewhere. In the US, for example, the number of listed companies has fallen from more than 7,000 in 1996 to below 4,000 today. More than 1,000 companies have disappeared from European Union markets over an even shorter period.

There are all sorts of explanations for this trend, from the increased availability of private capital to growing regulation of publicly-listed businesses.

For financial advisers and their clients, however, the declines all add up to the same problem; anybody who limits themselves to this universe of companies has far less choice today than in the past. And they are missing out on exposure to exciting, fast-growing companies that once would have boosted their portfolios.

It's a point that was echoed by Baillie Gifford partner Stuart Dunbar at an event organised for financial advisers last week by Citywire. He urged advisers to look beyond the diminishing pool of exchange-listed companies and to embrace private markets. Dunbar pointed to investment trusts as the ideal option for doing so – “the answer is staring them [advisers] in the face”, he told the event.

Now, Baillie Gifford is clearly not a disinterested party. Its trusts, including Scottish Mortgage, Edinburgh Worldwide and Baillie Gifford US Growth, are renowned for the positions they take in private companies. Their managers have freedom to allocate significant chunks of the portfolio to these businesses and have taken advantage, with holdings in private companies such as SpaceX, Stripe and ByteDance.

Nevertheless, leaving aside Baillie Gifford’s partiality, it’s an argument that advisers should consider. Almost all studies of historical investment returns find that private markets have consistently outperformed their public counterparts – even in the US, where the publicly-listed technology companies have delivered such stellar returns in recent times. 

Data published last year by Pitchbook, for example, found private markets had, on average, outperformed by around nine percentage points a year over the previous five years, and by five percentage points annually over the previous two decades. That’s quite a gap.

Importantly, Baillie Gifford is not the only game in town for advisers looking to boost clients’ private market holdings. Lots of other firms give their managers freedom to go down this route. Plus, the Growth Capital and Private Equity sectors of the investment trust industry are entirely dedicated to funds that invest predominantly in privately-owned businesses.

Investing in private markets through investment trusts has a number of important advantages. Investors get the benefits of diversification and professional management. And critically, they enjoy liquidity – investment trust shares can be bought and sold every single minute of the day – in an asset class that is generally very illiquid.

One final point to note is that while investment trusts as a whole currently trade on unusually cheap valuations – with shares at wide discounts to the value of funds’ underlying assets – this is a particularly pronounced effect at many funds with private market holdings. Now could be a great time to go bargain hunting.