Private Company Investments—Putting Your Network to Work

While financial headlines are often dominated by initial public offerings (IPOs) and the daily oscillations of the stock markets, investors are increasingly looking at private companies for wealth creation. With many companies taking longer to go public, more value is often created in the private markets before an IPO or exit. However, private company investing presents a series of unique obstacles such as a lack of data on private companies, longer exit times, and lower levels of liquidity than investments in publicly traded companies. Therefore, funds are recognizing that they can add value by managing private investments and can charge higher fees for these services.

As private company investing becomes more common, it’s critical for private equity (PE) and venture capital (VC) firms, hedge funds, and other investors to have as much data as possible on companies’ operations and performance, changing market dynamics, and other relevant information to help them make the right decisions. This is particularly important considering the constraints private investors face, and it’s why these investors need to leverage relationships with people in their networks to learn as much as possible about the private companies they’re interested in adding to their portfolios.

Private Investments Are Surging

Despite the massive economic shock of COVID-19, the private-equity market came roaring back in the second half of 2020. While deal volume collapsed when the pandemic got underway, it rebounded rapidly in the third and fourth quarters and has continued into 2021. A recent Bain & Company report found that this period “ended up being as strong as any two-quarter run in recent memory.” The report attributed this dramatic recovery to the nearly $1.6 trillion of “dry powder” PE funds have on hand.

There are clear risks associated with investments in private companies. Over the past 20 years, companies that went public have typically been larger and more established than companies in previous decades. At a time when special purpose acquisition companies (SPACs) are becoming increasingly common, fewer companies are profitable after going public. In fact, 81% of the companies that had IPOs last year were unprofitable in their first quarter as a public company. Of course, this doesn’t necessarily mean they won’t be successful, but it’s a reminder that funds investing in private companies need to take due diligence more seriously than ever.

Private Companies Offer Unique Investment Opportunities

Although private company data are difficult to come by, this can be an advantage for proactive investors. We live in an era of ubiquitous public data published across countless media outlets dedicated to covering the public markets. The widespread availability of information makes it more difficult for funds to identify promising investments that haven’t already attracted the attention of their peers.

Therefore, proprietary information offers tremendous advantages to funds that want to invest in private companies and networks are an essential source of that information. When investors have access to key decision makers at private companies, they won’t just have insight into how those companies are performing, the markets for their products and services, etc. They’ll also be able to leverage those connections to discover other chief executive officers (CEOs), board members, and stakeholders who can connect them to new private investment opportunities.

As an example, venture capital firm Sequoia Capital has over 400 companies in its current portfolio that have collectively raised close to $92 billion in capital.

The chart below highlights some of its more prominent investments that have recently gone public.

To help illustrate the power of the Sequoia network, we’ve included the network of Clari’s board members and other companies with which they are affiliated. According to Equilar ExecAtlas, their nine board members are connected to 1,209 other highly connected executives and board members who are affiliated with 1,410 other companies.

Conclusion

These deep connections present an opportunity for funds that want to be part of what has emerged as one of the most dynamic and potentially lucrative investment vehicles on Wall Street. But investors must understand how to make informed investments in private companies, and this begins by taking advantage of your network and their connections to access key contacts across your network.

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.