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

A public-private equity investment approach is one that combines both stock market-listed shares and private equity investments within the same portfolio. In recent years this has grown in scale globally, and we believe there is much more to come.

Both public and private equity investments can be attractive as standalone strategies. However, we believe bringing them together in the same portfolio confers some important benefits. These include access to a broader set of potential investee companies, the ability to invest at an early stage in a company’s existence, as well as enabling a wider perspective and consistency of stewardship.

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

Wider opportunity set

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

But that doesn’t mean there are no attractive tech companies in the UK, just that they aren’t publicly listed. Fast growing segments such as fintech (financial technology) can be accessed by private equity investors.

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

Broader perspective enhances knowledge

An investment team that looks across both public and private equity markets can gain a competitive edge from thorough knowledge of both types of companies.

Private companies often provide their investors with more information than public ones do, given the strict reporting rules that apply to stock market listed firms. 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 otherwise) of niche areas of the market.

Investing across a company’s lifecycle

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

Of course, not all companies seek a listing on the stock market. However, in the event that this is 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 IPO price. This potentially provides such investors with a superior ability to outperform relative to other public equity investors who enter at a higher price.

What’s more, we have found that IPO candidates often seek out long term financial partners early on, with a mutual understanding that these partners may act as cornerstone investors for the listing. In particular, our experience is that companies with an end goal to IPO are more likely to select investment firms that have internal capacity also to invest in the public equity markets.

Building a relationship in earlier funding rounds can therefore be an important competitive advantage for those who have the capacity to invest across the whole company lifecycle.

Opportunity to guide on ESG issues

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

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

And bringing together both public and private equity in the same portfolio means there is a single investment team who can provide consistent stewardship on ESG issues. We think this consistency is preferable to asset allocators selecting and investing in distinctly separate public equity and private equity vehicles.

Central point of governance is critical

To conclude, we believe there are several attractions of a combined public and private investment portfolio. Most critically, a central point of governance – i.e. a single investment team making the decisions – means that each part of a portfolio can be managed with reference to the other.

This enables monitoring of diversification – by sector or geography – and of other underlying exposures. It enables a wider perspective, where knowledge of a private company can help inform analysis of a public one (and vice versa). It also means an overall portfolio can be aligned to a single set of overarching risk, return and impact objectives.

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