Finding opportunities in private markets

Public and private markets have converged in recent decades: The number of U.S.‑listed public companies fell from more than 8,000 in the mid‑1990s to approximately 4,000 in 2024.¹ Over the same period, the number of active unicorns (private companies with USD 1 billion+ valuations) grew approximately 14x (from around 100 in 2014 to 1,463 in 2024), with 183 new unicorns created, on average, each year.² Companies are growing faster and remaining private for longer, creating significantly more opportunities to invest in private markets.

"Companies are growing faster and remaining private for longer, creating significantly more opportunities to invest in private markets."

Below, we explain why we believe now is a good time to consider investing in private markets and discuss how the three main types of private investment—traditional venture capital (VC), late‑stage venture/growth equity, and traditional private equity (PE) differ from each other. Finally, we focus in a little more depth on late‑stage venture/growth equity investing, which we believe is particularly suited to the current environment.

Private markets: Why now?

There are two key reasons why we believe now is a good time to invest in private markets: first, because private firms are increasingly finding they can achieve growth targets by staying private for longer; and second, because public markets have become very concentrated. Let’s take each of these in turn.

1. Staying private for longer can enable firms to focus on growth

One of the key reasons companies are choosing to remain private longer is their ability to focus on long‑term growth initiatives without some of the burdens public companies face. There is also now considerably more capital available for companies that choose to stay private longer. SoftBank’s USD 100 billion Vision Fund, launched in 2019, was one of the earlier catalysts of this trend. These vehicles are now common, with Mubadala launching the USD 100 billion MGX fund to invest in artificial intelligence (AI), Andreessen Horowitz launching a USD 20 billion AI fund, and Humain launching a new USD 10 billion vehicle for the same mandate.

"Many firms are deciding that it is easier to grow and take market share from incumbents as private companies...."

Many firms are deciding that it is easier to grow and take market share from incumbents as private companies as they can take big swings (such as large acquisitions, aggressive go‑to‑market strategies that do not focus on near‑term profitability, and research and development spending to invest in product differentiation, etc.) without being subject to the impact on the daily share price movements. Similarly, remaining private allows companies to put off costly compliance requirements that come with being a public company and the expectations to meet short‑term financial targets. These companies are now increasingly addressing employee liquidity (a concern for many when longer paths to exit come into play) to ensure employee retention and attract talent by offering large tender offers in the private markets, as recently demonstrated by Databricks, Stripe, and Canva.

As of last year, the median age of a VC‑backed unicorn had reached 8.2 years—up from 5.9 in 2015.³ Furthermore, 86% of U.S.‑based companies generating USD 100 million+ in the last twelve months revenue in 2024 were private⁴—and companies are now reaching this number faster in the age of AI. In 2018, young software‑as‑a‑service companies took an average of 60 months to achieve USD 30 million in annual recurring revenue; the top AI‑native companies of today are achieving that same USD 30 million scale in roughly one‑third of the time (i.e., 20 months)⁵ with growth rates often well above 100% year on year (versus some of the best software public companies growing at approximately 30% year on year).

2. High concentration has squeezed alpha opportunities in public markets

While this has been occuring, asset managers have been navigating a challenging capital markets environment in which both indices and returns have been dominated by the “Magnificent Seven” group of stocks (Microsoft, Amazon, Meta, Apple, Google, NVIDIA, and Tesla). Investors are increasingly looking to generate alpha and diversify away from the Magnificent Seven, and private markets offer an attractive way of achieving this. According to FS Investments, as of December 31, 2023, PE had outperformed the S&P 500 on a 5‑, 10‑, 15‑, and 20‑year basis.⁶

Market disruption typically occurs in private markets, so having a private investment strategy can be an effective way of gaining exposure to the next crop of category disruptors and “blue ocean” leaders in emerging industries. In software, for example, our analysis suggest that most of the top high‑growth names are still now delivering on growth above 30% year on year, so there is a real need to diversify exposure to certain high‑growth sectors through private exposure, which also explains why private companies get premium multiples.

Private equity ecosystem: What are the types of asset classes within the industry?

There are three main types of private equity investment: traditional venture capital (VC; Seed to Series B); late‑stage venture/growth equity (series C to pre‑IPO); and traditional PE. While all three strategies target investments in private companies, they vary in terms of company stages, capital structure, risk and return, and exit/hold periods. Below, we discuss each in turn.

1. Company stages

Traditional VC tends to occur before true product market fit (PMF) while the company is still in the early stages of generating revenue, albeit growing very quickly. In conjunction with angel investors, traditional VC tends to be some of the earliest capital in a company and often provides operational support to the build the team.

Late stage venture/growth equity investing focuses on high‑growth companies that have moved well past minimum viable product, have established PMF and are seeking capital to invest in further growth. Such companies typically have revenue streams that are both scaled and diversified. They tend to exhibit growth above their public peers and have a competitive advantage and a line of site toward generating free cash flow. They have often already raised meaningful capital from either traditional VC or growth equity investors, and as such, governance structures tend to be more established (founders‑controlled businesses are very common in the technology space). Companies typically enter this stage of their investment life cycle after their fourth or fifth round of funding.

Like late-stage venture/growth equity investing, traditional PE investing tends to focus on more scaled companies. However, PE typically focuses on more mature companies and takes majority stakes in those businesses, while putting in place a value creation plan (VCP) where they have specific initiatives they will be undertaking to increase the company’s profitability and efficiency across operations before looking to sell the asset to another PE firm or strategic buyer. PE targets are often growing at a slower pace and are more efficient in terms of profitability. Some PE firms also put in a new management team in place in the company after acquiring the asset to implement their value creation plan. Firms like Thoma Bravo, Vista, TPG, and KKR are examples of private equity investors.

2. Investment capital structure

Both traditional VC and late stage venture/growth equity tend to be small minority positions (i.e., less than 20% ownership). In traditional VC, investment rounds are typically made for 20% or less ownership of the company in the form of preferred shares. Investors generally receive pro‑rata and information rights, with the lead granted a board seat. By contrast, late‑stage venture/growth equity investing is more situation dependent. Companies at later stages tend to already have an established board and are often starting to add independents as they start their IPO readiness journey. They can come in all forms of common, preferred, primary (i.e., new), and secondary/tender offers (which give liquidity to early investors and employees).

Like traditional VC, late-stage venture/growth investments typically come with pro‑rata⁷ and information rights, but often not a board seat. Traditional PE, on the other hand, seeks a controlling position in the company. The acquisition typically contains a meaningful portion of debt, which then introduces further deal structures around debt covenants. Often, changes to the leadership team are made upon the completion of the transaction.

3. Risks and returns

The underwriting risks and potential returns vary across these three categories and can be broadly grouped as:

• Traditional VC: High risk, high reward—often characterized by a high loss ratio but one to two single wins that can return more than the fund size;
• Late‑stage venture/growth equity Moderate risk, moderate‑to‑high reward—lower loss ratio, but fund size is often returned by the combination of a few wins; and
• Traditional PE Low‑to‑moderate risk, moderate reward.

In traditional VC, investors are making many bets across companies with unproven/nascent business models and thus targeting 5x–10+x multiples on invested capital (MOIC) depending on the stage of the investments or betting that, if successful, the investment can return the fund size. These investors must target these higher returns to account for the large portion of their investments that will ultimately fail (loss ratio) or contribute only a marginal return and thus rely on a few “home runs” to drive overall portfolio returns.

Late‑stage venture/growth equity investments may not have all the risk attributes as traditional VC and can more closely resemble the returns on traditional PE, with some differences. Pre‑IPO investments are generally geared toward more high‑growth companies that have often forgone current profitability that is typically a requirement in traditional PE investments in order to capture greater market share heading into a public offering. Investors in this category usually target a 2x–5x MOIC over shorter holding periods versus venture capital.

Traditional PE firms make far fewer investments out of a fund and, given the control they have, do not expect any binary outcomes. Because a single poor investment can sink a PE vintage, fund managers are more risk averse and typically target an MOIC of more than 2.5+x on more scaled/profitable companies.

4. Hold periods and exits

Of the three, traditional VC has the longest hold period. These early bets can take a long time to mature, and a typical hold period might be 10 years. The most likely path for exit tends to be a mergers and acquisitions (M&A) event or a secondary sale, with IPO activity still significantly below pre‑2021 levels.

For late‑stage venture/growth investors, a public offering is the desired outcome (although they usually would not stand in the way of a large M&A event), and most investors are underwriting toward a one‑ to four‑year IPO window. For traditional PE, most funds target a four‑ to seven‑year hold period with exit options including a sale to a strategic partner, a sale to another PE firm, or even an IPO.

Late‑stage/growth equity investing: How does it differ from public markets?

We believe that late‑stage venture/growth equity investing is particularly suited to the current environment as it offers access to opportunities arising from ongoing technological developments. These opportunities divide broadly into two types: category leaders and “blue ocean” companies.

1. Category leaders

Late‑stage venture/growth equity investing offers access to companies that appear poised to fundamentally change the way a product or service class operates by redefining customer experiences through technology. Numerous such companies have emerged in recent years. Databricks and VAST Data, for example, are both drastically reimagining modern data infrastructure and storage in the age of AI in a world where it has become part of every organization.

Perplexity is bringing large language models (LLMs) to the fingertips of everyday consumers in lieu of traditional browser‑based search querying and allowing everyone access to research reports that would have taken days to produce in a matter of minutes. ByteDance has not only transformed the use of short‑form video in social media, but also has changed the way a new generation receives and digests news and entertainment, while Anduril is showing how new autonomous technology and AI can be combined with defense hardware to redefine the defense procurement industry.

2. Accessing blue ocean opportunities created by new technologies

Private markets also give investors access to rare “blue ocean” companies. While category disruptors take market share from established incumbents, blue ocean companies are those creating entirely new markets and/or making current incumbents obsolete. Such opportunities are rare and usually only available in the private markets.

A recent example of a blue ocean company is OpenAI, which took the world by a storm with the release of ChatGPT and brought the power of LLMs to both consumers and enterprises across the globe. OpenAI’s competitors, which include xAI, Anthropic, Safe Superintelligence, Thinking Machines, Mistral, Poolside, and Deepseek, are bringing competing AI solutions to this green field opportunity, each with a slightly different go‑to‑market and target market. The release of ChatGPT has also completely transformed vertical software with plenty of room for companies to build AI‑native applications on top of these models across finance (Hebbia), software development (Cursor), enterprise search (Glean), media (Runway), and legal services (Harvey).

An even more relevant example exists in the area of space commercialization. SpaceX has created a new market for satellite and rocket launches and made reusability a reality, changing the economics of the industry. In transportation, Waymo has made autonomous vehicles feel safe and nearly normal in the same way Airbnb did for home rentals and Uber did for ride‑sharing a decade prior.

In computing, we are seeing transformational gains in quantum computing, with PsiQuantum accomplishing complex computational problems that would have taken conventional computers thousands of years to complete. Finally, we are seeing the emergence of general‑purpose humanoid robotics from firms including Figure AI, 1x, Agility Robotics, and Apptronik, which are already having a material impact in automotive factories and will eventually serve as assistants in everyday households, while other companies like Physical Intelligence and Skild AI are building research labs for the future of robotics.

Why consider late‑stage venture/growth as part of a diversified portfolio?

The ongoing pattern of more companies choosing to remain private longer has made investing in private markets more compelling when looking for high‑growth tech companies. This is reflected by an increase in the number of investors seeking those opportunities as they look for ways to diversify from public markets. Private markets offer access to the next wave of innovative firms at an earlier stage, bringing the potential for greater returns.

As capital for private markets is now widely available, access (ability to invest in hypercompetitive rounds), selection, a clear differentiated value proposition as an investor for the company, and research have become essential to get into the best assets; hence the need to be supported by the right investment manager.