Schroders: What are the benefits of a public-private investment approach?

A public-private equity investment approach is one that combines both publicly traded equities and private equity investments within a single portfolio. In recent years, it’s been gaining momentum globally, and we think there’s a lot more to come.

Both public and private investments can be attractive as stand-alone strategies. However, we believe that bringing them together in the same portfolio confers significant advantages. These include access to a wider set of potential beneficiary companies, the ability to invest at an early stage in a company’s existence, as well as allowing for a broader perspective and consistency Management.

We believe all of this allows an investment team to create the best possible portfolio for clients. Read our full analysis here.

Wider set of opportunities

Stock markets in different geographies have different degrees of diversification. In the UK, for example, the technology sector represents only around 1.4% of the MSCI UK index, compared to almost 30% for the MSCI US.

But that doesn’t mean there aren’t attractive tech companies in the UK, just that they aren’t listed on the stock exchange. Fast-growing segments such as fintech (financial technology) are accessible to private equity investors.

A portfolio that combines both public and private investments can therefore invest in the best opportunities in either market segment.

A broader perspective improves knowledge

An investment team that examines both public and private equity markets can gain a competitive advantage through in-depth knowledge of both types of companies.

Private companies often provide more information to their investors than public companies, given the strict reporting rules that apply to publicly traded companies. Information from a private company can therefore help shed light on a public company operating in the same field; for example, on industry issues such as competition or demand trends.

This can be particularly useful when assessing the attractiveness (or not) of market niches.

Investing throughout the life cycle of a business

An integrated public-private equity approach also offers the opportunity to invest at all stages of a company’s life cycle. This can range from the venture capital stage, through subsequent funding rounds, to a stock exchange listing, and beyond.

Of course, not all companies seek to be listed on the stock exchange. However, in the case of a company’s ambition, investors who are able to invest in the company at an early stage are often able to do so at a lower valuation than the eventual price. of the IPO. This potentially offers these investors a greater ability to outperform compared to other public equity investors who enter at a higher price.

Additionally, we have found that IPO candidates often seek long-term financial partners early on, with a mutual understanding that these partners can act as grassroots investors for listing. In particular, our experience is that companies whose end goal is IPO are more likely to select investment firms that also have the internal capacity to invest in equity markets.

Establishing a relationship in earlier funding rounds can therefore be a significant competitive advantage for those with the ability to invest throughout the life cycle of the business.

Opportunity to guide on ESG issues

The relationship building made possible by early-stage investing can also be beneficial when it comes to stewardship and environmental, social and governance (ESG) issues.

Companies in an early stage of their life cycle may have limited sustainability policies and infrastructure. By investing early, before these companies hit the public markets, private equity investors have the opportunity to drive meaningful change through partnership on ESG issues. This could include implementing diversity and inclusion and environmental practices at an early stage, and recommending an appropriate board structure.

And by bringing public and private equities together in the same portfolio, there is a single investment team that can ensure consistent management of ESG issues. We believe this consistency is preferable to asset allocators selecting and investing in separate private equity and private equity vehicles.

The central point of governance is essential

In conclusion, we believe there are several attractions of a combined public and private investment portfolio. More importantly, a central point of governance – that is, a single investment team making the decisions – means that each part of a portfolio can be managed with reference to the other.

This makes it possible to monitor the diversification – by sector or by geography – and other underlying exposures. This allows for a broader perspective, where knowledge of a private company can help inform analysis of a public company (and vice versa). It also means that an overall portfolio can be aligned with a single set of overall risk, return and impact objectives.

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