- Startups are going public much later. With all the money flowing into the private sector, companies are going public at a much later stage than before. Take, for example, Amazon. When it went IPO in 1997, its market cap was $438 million. Today it is $202 billion, which is 460 times as high as the IPO price. Compare this to Alibaba: when it went public last year, its market cap was $155 billion. In order to make the same kind of return as Amazon, Alibaba has to grow to a company with a market cap of $71 trillion by 2032 – which is almost impossible. Because of the current trend, many investors are missing out, and therefore they have to invest in the private market in order to reap higher (potential) returns.
- Globalization. It helps private investments to reach a broader audience. While seeking funding, companies do not need to be limited to their local markets. Thanks to the Internet, they can easily market themselves, raise funding and make financial transactions online. At the same time, investors are looking abroad to diversify their investment portfolios. The ease of making investments and raising funds globally is making private investments more popular than ever before.
- Information transparency. Startups are not as ‘mysterious’ as they once were. Information on startups and private companies is now more transparent and can be readily found and attained. There are databases and analyses of different types of startups, venture capital firms and angel investors, etc. Not only has the abundance of information instilled greater confidence towards investing in private companies, but also makes it easier for investors to track their investments.
- Syndication model. It has largely broadened the investor base. One investor can lead a deal, and many other investors who did not participate in the past can now follow the lead investor and back the deal.
- Rich valuation. Lastly, valuations on private companies have reached the highest level in the past decade. There are currently 91 companies valued at $1 billion or more by VC firms, compared with just 56 years ago. Everyone is talking about chasing unicorns (e.g. the next Uber), which is pushing the valuations even higher. The higher these valuations become, the more investors want to invest.
Timothy Yang, Director of Business Development at DealIndex, says: “The push towards more information transparency, globalization and evolving private company structures mean that the fundamentals of the private market are constantly changing. It is certain that the rise of private investment is here to stay and will increasingly become more open to investors globally.”
Private investment no longer is just within the exclusive domain of traditional private equity and venture capital firms.