How to access private companies before they launch on the stock market

AIC analysis published in March identified 11 investment trusts with valuable holdings in private companies tipped for an IPO. In addition to SpaceX, these companies included ChatGPT creator OpenAI and TikTok owner Byte Dance, as well as Databricks, Stripe, Anthropic and Revolut. All will benefit from the frenzy around Musk’s venture, with investor demand for IPOs spiking higher.

About time too, some might say. In recent years, the global IPO market has been relatively quiet, at both the level of these blockbuster deals but also more broadly. The uncertain geopolitical and economic conditions have not provided the benign environment that businesses planning IPOs prefer. No-one selling a chunk of their company wants the market to decide it’s worth, say, 20% less than expected because of a sudden and unexpected event completely out of their control.

Data from EY shows that worldwide, there were 1,331 IPOs with proceeds of $177bn last year; that was an improvement on the previous year, but low by historical standards. In the peak year of 2021, EY says there were 2,388 IPOs globally, raising $453bn between them. 

Now, however, the dam may be about to break, to the benefit of private company owners, including the investment trusts have taken stakes in them. These include multiple funds managed by Baillie Gifford, including Scottish Mortgage, Edinburgh Worldwide and Schiehallion Fund, but also Private Equity sector funds such as Pantheon International and HarbourVest Global Private Equity, and representatives from the Flexible sector, such as RIT Capital Partners.

The structure of investment trusts makes them uniquely well suited in the collective fund world to back private companies. The problem with investing in such businesses is they’re illiquid; with no shares listed on public stock markets, it can be hard to buy and sell stakes. 

For most funds, that’s challenging – as investors’ money comes in and out of the fund, they often need to buy or sell shares quickly. An investment trust, by contrast, has a closed-ended structure; investors get exposure to a fixed pool of assets by buying the trust’s shares on the market, rather than investing directly into the fund. Therefore, the liquidity issue does not apply and managers can take a long-term view.

For this reason, investment trusts represent most retail investors’ best chance of accessing privately-owned companies – both the big names everyone is currently talking about and a much broader set of businesses of all shapes and sizes.

 In some cases, funds simply take a stake, betting it will rise in value; in others, they’re actively involved with the companies where they’re invested, working with the management teams to drive success.

This opportunity has become more important in recent years. Traditionally, private companies with good prospects would seek to IPO as quickly as possible, often to raise money to invest in growth. Today, however, there are plenty of other sources of funding, and private companies often decide to wait much longer. The average age of a company at IPO was five years in 1999, but almost 14 years in 2024, according to data from Schiehallion Fund.

As a result, investors are losing out. They can’t get exposure to exciting companies until they’re much more mature – often once the most explosive stage of their growth is over. They miss out on the returns that such companies generate.

SpaceX looks like an extreme example of this story. Baillie Gifford says its trusts first bought into the company at an effective price of $31 a share; today, the price is more like $800. Clearly, not every privately-owned company is going to deliver rocket fuelled-returns of such magnitude. But investment trusts provide the opportunity for retail investors to get into such businesses before they leave the launch pad.