So far, index investing has worked well for me. About a year ago, I began diversifying into large private or unlisted companies that expect to list over the next two to five years. There are now just over 4,100 listed companies in the US compared with nearly 8,300 in 1995. So, over the past 30 years, the number of listed firms in the US has more than halved. Those that disappeared were either acquired by larger competitors or private equity (PE) firms, or in some rare cases, vanished because they just went bust.
As the number of listed companies shrinks, market concentration has grown. The top 10 companies in America, nine of which are tech icons, now make up about 40% of the value of companies in the barometer S&P500 index, which, in turn, accounts for nearly 85% of the value of all US-listed firms. If all you want is access to unlisted private firms, shouldn’t you just buy into a PE fund? If you have read my columns on PE firms over the years, you are probably aware that PE funds vastly underperform index funds over the long term. PE’s business model is simple: For the most part, they buy small or medium-sized companies, load them up with a ton of debt and then charge huge fees. It’s often layers and layers of debt, topped up with fees upon fees upon fees.
What is left for investors is often far less than the return they can get from something like a plain vanilla index fund. Over the past 15 years, the S&P 500 index has returned over 14% annually on average, inclusive of dividends. PE funds have averaged under 9% annually in the same period. If you really want exposure to PE assets, you are probably much better off buying listed shares of PE firms like Blackstone, Apollo Global, KKR and Carlyle, which have all far outperformed the funds they run over a three-, five- or 10-year period. Unfortunately, there weren’t many large listed PE firms 20 years ago.
That leaves investors with large, high-growth individual private firms since small-cap stocks have severely lagged for over 30 years. Waiting for small caps to recover is akin to waiting for Godot. Time was when buying unlisted tech unicorns was mainly for venture capitalists (VCs) or ultra-high-net-worth investors with hundreds of millions of US dollars. When I first began looking at investing in tech unicorns nine years ago, I recall talking to someone in San Francisco who told me that he would be happy to help me get access to a coveted tech firm’s shares if I was willing to fork out a few million for the purchase. That has changed over the past few years as space has opened up to retail investors. VCs and ultra-wealthy still get the first bite, but allowing mass affluent investors to partake can help boost valuations.
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Democratising private investments
Increasingly, private investments are being democratised, and investors like you and me can now buy into unlisted companies like the world’s most valuable start-up, OpenAI, the creator of artificial intelligence chatbot ChatGPT, Elon Musk’s SpaceX or China’s ByteDance, the owner of popular short-form video app TikTok.
There are several ways to invest in an unlisted firm. You can buy the stock from employees of unlisted firms who want to monetise part of their stock options. Large unlisted companies with valuations of up to half a trillion US dollars ($652 billion) increasingly choose to remain private to avoid the regulatory burdens and short-term pressures of public markets, allowing them to focus on long-term strategy, retain control, and access sufficient capital from a robust private investment market. Some tech unicorns require approval for purchases or transfers of employees’ shares to outsiders. Platforms selling you employees’ shares have lawyers who get employees to sign a bunch of forms, and there are thick legal documents that you sign when you buy the shares on the platform, but nevertheless, there are risks involved. Fortunately, so far, there have been no major glitches even though tens of billions of private shares are now traded by retail investors every year.
There are also a bunch of private share marketplaces like Hiive, EquityZen (acquired by investment bank Morgan Stanley last month) and listed Forge Global (formerly SharesPost), which on Nov 7 was acquired by giant brokerage Charles Schwab & Co for US$660 million ($860 million). The stated goal of Hiive, EquityZen and Forge Global, which sell not only employees’ shares but also shares initially purchased by VCs and other institutions, is to unlock the value of private markets and address the opacity and inefficiencies traditionally associated with private market trading. Minimum investments needed are between US$5,000 and US$10,000, depending on what you are buying. You also need to be an accredited investor with a net worth of at least US$1 million, excluding your home, or an annual income of over US$200,000.
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Then there are venture capital asset managers who work with banks, brokerages and wealth management firms to build bespoke pre-IPO portfolios for their clients. Prominent among them is AG Dillon & Co, whose funds are listed on online platforms such as Fidelity and Charles Schwab. Want to buy Musk’s AI firm xAI, which now also owns X (formerly Twitter)? You can fork out as little as US$2,500 and buy the xAI Fund 3 on one of those platforms or directly from Dillon itself. Or perhaps you want to buy Groq, the AI inferencing chip design start-up? Dillon’s Groq Fund 4 is listed on those platforms.
Marketplaces like Forge, Hiive and EquityZen have surged in popularity as investors and employees of tech unicorns search for liquidity amid the IPO drought of recent years. The boom in private tech investing has been accelerated by the VC industry and regulators to make private capital markets more accessible to mass affluent retail investors and private wealth clients who have profited handsomely over the past decade from soaring tech stocks. The S&P 500 is up 522% over the past 10 years, while the Nasdaq 100 is up 1,106% over that period. Having made a lot of money in public markets, US investors are now turning to private markets to diversify their portfolios. “Just sell a little bit of your Nvidia, Broadcom, Amazon or Google, and buy more unlisted companies” is the sort of advice one hears from friends in the US these days.
Popular unicorns
So, what are investors buying? Among the popular investments is top AI startup OpenAI, which was valued at around US$500 billion during a recent funding round and is expected to list within the next two years. Last month, OpenAI completed a transformative restructuring, converting its capped-profit subsidiary into a for-profit public benefit corporation. Annualised revenue run rate is now US$20 billion and the firm is targeting US$100 billion by 2027. OpenAI now has a US$575 billion secondary market valuation, up 15% from its August round.
Others include SpaceX, the owner of Starlink Services, which has over 8,800 satellites in orbit, providing broadband internet to millions of users worldwide. SpaceX is now worth US$446 billion in the secondary market, up from US$210 billion just 16 months ago and US$350 billion at the end of last year when Musk bought half a billion worth of shares from employees who wanted to sell some of their stock options. Starlink alone could be worth more than half of that, in part because it is an attractive pure-play global satellite internet provider.
To give you an idea of why Starlink is worth so much, its active satellites make up over two-thirds of all commercial satellites in the sky. The company accounts for 70% of SpaceX’s total revenues. Starlink, which recently won a US$2 billion contract with the Pentagon for up to 600 air-moving-target-indicator satellites to detect missiles and aircraft under President Donald Trump’s “Golden Dome” initiative, expects revenues of US$11 billion this year, up 42.9% over last year.
OpenAI’s closest competitor, Anthropic, whose investors include Amazon.com and Google’s parent Alphabet, and is the creator of popular chatbot Claude, was valued at US$183 billion during its own last funding round just eleven weeks ago. Its implied valuation in the secondary market is up 17.3% since. Anthropic, which expects to turn a profit by the end of 2027. Another in-demand unicorn AI data analytics firm Databricks, which is valued at US$100 billion during its last funding round in August. Since then, its valuation has surged 14.6%.
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One of the fastest-growing unicorns is defence contractor Anduril Industries, founded by former Meta Platforms executive Palmer Luckey, who joined the firm when he sold his virtual reality start-up Oculus to Mark Zuckerberg. Anduril expects to burn up to US$900 million in cash this year as it aggressively seeks to win large Pentagon contracts. This huge cash burn is expected to help fund its first major weapons manufacturing facility and the development of an autonomous fighter jet, among other key projects. Anduril has deftly positioned itself as an AI-era challenger to long-entrenched defence contractors like Northrop Grumman and Lockheed Martin.
Anduril combines its chops in defence with its expertise in AI and software. Some VCs have described Anduril as an EV pioneer, Tesla, and data analytics firm Palantir rolled into one. That narrative has helped propel it to the hottest defence contractor in the US. The firm had over US$1 billion in revenues last year and expects to more than double that this year. Anduril, named after the sword of Aragorn in The Lord of the Rings, was valued at US$30.5 billion during its last funding round in February. Since then, its valuation has surged over 90% to US$58.4 billion. Anduril, which is aiming for big contracts that traditional contractors have been gunning for. Luckey has talked about an IPO late next year.
What’s next? Expect more public market retail investors in North America, Europe to diversify away to private companies like tech unicorns. Private banks in Asia are already giving clients access to US tech unicorns and mass affluent investors in the region are likely to get access soon. A bunch of IPOs like Anduril, and Starlink or indeed its parent SpaceX, over the next two years, will turbocharge the ongoing global boom in private tech investments.
Assif Shameen is a technology and business writer based in North America
