SpaceX’s filing for what may be the largest initial public offering in history underlines the potential gains on offer to those investors able to fish in the private markets.
Some of the best-known companies in the world — not just SpaceX but the likes of Anthropic and ByteDance too — are not publicly listed. Until they float, ordinary investors lacking the connections or the millions usually required to access private markets can struggle to buy into them.
Those who do want to own a slice of Elon Musk’s rocketry empire, however, or the AI pioneer, have one tried and tested means: UK investment trusts. Many of these have been rapidly increasing their exposure to non-public assets, in a bid to give retail investors access to potentially fruitful enterprises.
Several currently hold SpaceX stock at a valuation of $800bn — less than half the $1.75tn the company is believed to be targeting for a putative June flotation, although there is no guarantee this will be achieved.
However the trend towards private assets also poses difficult questions about valuation and performance.
Putting aside those investment companies that specifically deal with private equity, trusts have increased their holdings of non-listed companies by 65 per cent over the past five years to £13.4bn, according to the Association of Investment Companies.
And some may go further still. Scottish Mortgage said in March it would seek shareholder approval to lift its self-imposed 30 per cent cap on unlisted holdings after a jump in SpaceX’s valuation pushed the unlisted company beyond 15 per cent of its portfolio.
Partly, this is because of the changing nature of the market. “We are seeing an increase in private holdings as a result of the market dynamic of companies staying private for longer and a lot of [these companies being] high-profile marquee names,” says Alex Trett, an investment trust research analyst at Winterflood Securities, a market maker.
Companies are now staying private for an average of 11 years, up from 6.9 years in 2014, according to Morningstar, during which some are enjoying extravagant gains.
The Morningstar PitchBook Global Unicorn Index, which tracks the fortunes of venture-capital-backed companies valued at $1bn-plus, has returned 677 per cent since 2014, far outstripping the 210 per cent gain of Morningstar’s global index of large and mid-cap listed companies.
“The opportunity set in private assets has grown pretty astonishingly in the last 10-15 years,” says Trett. “[Investment trusts] are driven by market forces. With the rise of retail investors as a per cent of the investor book, this gives them access to private assets that they wouldn’t have through other routes.”
Since investment trusts are closed-ended, Trett says they are reasonably well suited to holding typically illiquid private assets, which can be difficult to sell in a hurry.
Although in theory Europe’s Ucits mutual and exchange traded funds can hold up to 10 per cent of their portfolio in private companies, very few do because daily dealing creates valuation and liquidity problems if redemptions surge.
Many FT readers will remember what happened when Neil Woodford’s eponymous equity income fund mixed daily dealing with hard-to-sell holdings: it was suspended in 2019 and later wound up, leaving 300,000 investors out of pocket.
A handful of US-listed ETFs have recently followed suit, but problems are already emerging, with one fund now left with 44 per cent of its portfolio invested in SpaceX alone after a rash of redemptions.
Baillie Gifford’s investment trusts have been increasing their private holdings for more than a decade. Today, its £850mn US Growth Trust has 41 per cent unlisted holdings; its £15bn Scottish Mortgage Investment Trust has 37 per cent; and its £820mn Edinburgh Worldwide trust has 29 per cent, according to AIC figures — although Baillie Gifford is seemingly resigned to losing control of the latter, following an activist attack by Saba Capital.
Among the successes have been Baillie Gifford’s investments in SpaceX, Anthropic and ByteDance. There have been failures, though, such as a holding in Northvolt, which was written down to zero when the Swedish battery maker went bankrupt last year.
As has recently been the case in public markets, returns have been driven by the “hyperscalers” and investment has largely been about finding the big winners, says James Budden, Baillie Gifford’s global head of marketing.
“There are asymmetric returns,” he says. “You can lose 100 per cent but you can make 1,000 per cent. That is the payoff.”
He goes on to claim. “If you speak to shareholders, they are very happy with this kind of long-term development over the last 15 years. They consistently vote in favour of it.”
RIT Capital Partners is another to take this approach, with a private weighting of 32 per cent.
Maggie Fanari, chief executive of J Rothschild Capital Management, which manages the £4.5bn trust, says: “There is definitely investor interest in this. This isn’t an asset class that is accessible to everybody. [We have holdings] that people are very keen to own, such as SpaceX, Anthropic and Databricks.”
In terms of performance, over the past three years RIT has generated a total return of 25 per cent in price terms and 27 per cent in net asset value terms, according to data from Winterflood, broadly in line with its sector averages.
Over at Baillie Gifford, Scottish Mortgage has done better, returning 58 per cent in NAV terms but 84 per cent in price terms, mainly due to a substantial share buyback programme.
The US Growth Trust has done better still, returning 66 per cent in NAV terms and 103 per cent in price, while its Schiehallion fund, which invests purely in private assets, has generated 51 per cent in NAV terms and 174 per cent in price, in the process making it a very rare beast in the investment trust industry — a company whose share price trades at a premium to NAV.
As so often, statistics can be spun either way, though. Looked at over the past five years — a period which includes the pandemic-era growth mania and the resultant slump as interest rates rose sharply — performance appears lousy.
“Performance [of private assets] can be more extreme and more lumpy. It is not as uncorrelated as they say [to public assets],” says Daniel Haydon, fund analyst at Morningstar.
There can be other issues with private companies as well, given that their periodic revaluations can be large, potentially significantly altering the balance of a fund’s portfolio.
“There are significant operational challenges when it comes to managing unlisted exposures and weightings,” Haydon adds. “Portfolio management becomes tricky. You can end up with what some may think of as slightly heretical sizing,” he says, referring to when a private company can become a larger weighting in a portfolio than a diversified fund would generally want to have in one company when there is an “up” funding round.
And, of course, there is the problem of transparency. “How do you model SpaceX? Where are their earnings going to go over the next five or 10 years? That is the really challenging thing here,” says Alan Brierley, head of investment company research at Investec.
What’s more, the need for significant share buybacks in some trusts as they battle challenges from activist investors suggests demand for private assets has, in most cases, been tepid.
“I consider investment trusts to be ideal vehicles to access private market opportunities. So why aren’t they more popular?” Haydon asks.
