Time is on your side. According to Alan Coffey, a director in the private companies’ team at Baillie Gifford, that’s a key take away for a private growth equity investor.
“As you know, more companies are opting to grow and stay private for longer before the IPO, which is creating tremendous value capture for investors who invest in that space,” he says and adds that it was part of the reason why he joined Baillie Gifford.
“I’ve worked in private equity now for 22 years. I started at Goldman in London and spent the last five years at BlackRock, always within the private equity divisions of those firms. I honestly think that the space we’re in, private growth equity, is still quite nascent. At Baillie Gifford, we’ve been investing in private growth companies for some 15 years, so we’ve seen the institutionalization of the asset class. Today we’ve invested over USD 11 billion in more than 170 companies, but when I talk to investors across Europe, most are still considerably under allocated to this asset class,” he says.
He explains that most traditional institutional investors will have some 10 per cent in private equity and a majority of that will be buyouts. Then there is a smaller part in venture capital. Often, they have no allocation to private growth equity and that, he says, blows his mind.
“This asset class within private equity emerged because of the private for longer trend and I think investors, quite frankly, have been a little bit asleep at the wheel. That excites me though, because it means to go from zero to somewhere else means there’s a lot of road ahead. And then secondly, I would say private growth is just the most interesting space because some of the incredible innovation and growth in our economies are happening in that very space. Obviously, it’s happening in the venture capital space as well. That’s kind of the prelude to when we start investing, but with venture you have a much wider risk spectrum. We’re investing a lot later where you can see that some of the winners are beginning to come through, but there’s still loads of capital appreciation left,” he says.
Alan Coffey says that some 15 years ago, an institutional investor would own these companies in their public equity allocation. Today they don’t because these companies are not yet listed. It’s also not picked up in the private equity allocation, where the focus has been on buyouts. “There’s this big blind spot at the moment. That excites me and that’s why I joined Baillie Gifford,” he says.
Asked where the allocation to private growth equity will come from – from the listed equity side or from the private equity allocation, Alan Coffey says that it’s most likely to be a mix of both.
“The history of our business is that we’ve given investors exposure to the most transformational growth companies in the world. Historically, that meant investing and building portfolios of listed growth companies. Some 15 years ago, we realized that some of those incredible businesses are not going public but stay private for much longer. Why would we limit ourselves just because of this fictitious line of a company crossing from being private to public through an IPO,” he says.
Asked about some of the typical questions he gets from investors, Alan Coffey says that there are two things that jump to his mind for the more seasoned investors in private equity.
“One is a question around risk return metrics and I think there’s a slightly ill-informed perspective that this is still very risky. We invest in proven businesses, which are already generating a lot of revenue and what that means is the risk profile of those businesses are fundamentally different to a venture capital investment. I think clients are pleasantly surprised with that. The other question that comes up quite often is if we control the businesses and what we do to improve it. The answer is we are typically a minority investor, and our job is to find a great business with a great culture and a great founder and let them continue doing what they do so successfully. As an experienced investor, both public and private, we can add value in many ways. As they go on that path to becoming a public company, we can help them understand how they make themselves public market ready through governance, through how they communicate with investors and through avoiding some of the mistakes and pitfalls that we may have seen other companies do over the years. We’re not telling them how to run their business,” he says.
Asked about the cooperation between the private growth equity team and the team at Baillie Gifford that invests in listed equities, Alan Coffey says that even if it’s a separate investment decision for the public team, having this continuity of capital is very attractive to companies on their growth journey.
“We’re known as a very patient, long-term investor in the public space and that’s attractive to these companies. As they go public, they don’t want short term focused investors who may flip their stock every few days. Having a shareholder base of long term aligned capital is much more attractive to them. This also helps us as we source deals because private companies choose their cap table. They’re literally choosing who gets to invest in their company and our structure is attractive to them,” he says.
Asked about the importance of being a well-known and trusted brand when talking to institutional investors, Alan Coffey says that Baillie Gifford is very well known in the listed space. Clients are often surprised to hear how large our private capability is however. “When I tell clients that we’ve invested almost USD 11 billion in this space, their jaw drops. They can’t believe it. Some of the top brands in private equity have of course been around for longer than us, but private growth is a more nascent asset class, and we were there right at the start. When we explain our story, it makes a lot of sense to people. We continue to invest in the same type of companies that we’ve always invested in – it’s just that many of them stay private for longer and that’s why we started this business,” he says.
