delayed IPOs and investing in total US market

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boglebrain
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Joined: Sat Mar 15, 2014 9:55 am

delayed IPOs and investing in total US market

Post by boglebrain » Mon Mar 12, 2018 8:01 pm

In the last 20 years there has been a significant shift where companies wait much longer before going public. This means that a disproportionate share of the "upside" is accrued to venture capital and private equity that is invests in these companies. You read about the private financing that companies like Uber, AirBnB, DoorDash, etc are getting and so when they eventually go IPO much of the gains will have already been give to private investors compared to how it used to be. Is this a cause for rethinking how one invests in the stock market?

1. Can one easily invest in these types of companies through some specialized ETF/mutual fund? I know there are "secondary share" markets where you can build a portfolio but that is a lot of work and you are stock picking.
2. How much should one allocate to this as a % of "total US market"? My main concern is that the "US stock market" has changes from 20 years ago and so ideally one tries to best reflect what the total US market might be.
3. A more broad question: Is it worth trying to get exposure to a broader set of private companies? Are there effective ways of doing this with a broad-based low cost approach?

thanks in advance.

lack_ey
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Re: delayed IPOs and investing in total US market

Post by lack_ey » Mon Mar 12, 2018 8:11 pm

The "total market" as we think of it is definitionally just public equity. It's never included pre-IPO stocks. The characteristics of public vs. private equity can and do change, as do a lot of other things (mergers/acquisition activity, dividends/buybacks policy, not to mention market pricing more generally and everything else).

If you check the long-term return of mega cap stocks, that's looked fine over time to me. If you say that companies stay private longer these days, that has more of an impact outside of the largest stocks. Possibly for a lot of reasons, today's small caps are not the same relative to large caps as they were before. Liquidity is higher, maybe there's something to this late-IPO storyline, etc. But it doesn't much change the performance of the largest stocks and by extension the total market index funds.

I don't think you can really get significant and/or diversified access to these companies, never mind for cheap. And even if you did, it would be at later stages of financing.

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: delayed IPOs and investing in total US market

Post by MotoTrojan » Mon Mar 12, 2018 10:09 pm

https://www.marketwatch.com/story/heres ... 2018-03-05

Be sure to check-out the returns though :). I have gotten to ride a nice wave of growth from previous employer stock at a mega-cap private company, but Amazon/Netflix blew it away these past few years. I'll stick to VTI/VIOV for my US exposure.

Valuethinker
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Re: delayed IPOs and investing in total US market

Post by Valuethinker » Tue Mar 13, 2018 3:24 pm

boglebrain wrote:
Mon Mar 12, 2018 8:01 pm
In the last 20 years there has been a significant shift where companies wait much longer before going public. This means that a disproportionate share of the "upside" is accrued to venture capital and private equity that is invests in these companies. You read about the private financing that companies like Uber, AirBnB, DoorDash, etc are getting and so when they eventually go IPO much of the gains will have already been give to private investors compared to how it used to be. Is this a cause for rethinking how one invests in the stock market?

1. Can one easily invest in these types of companies through some specialized ETF/mutual fund? I know there are "secondary share" markets where you can build a portfolio but that is a lot of work and you are stock picking.
Don't you have to be an "accredited" investor from the perspective of the SEC? That may be the wrong US regulatory term.

I know Fidelity (anyone else) has put some of these stocks into some of these funds. My experience of this in the 2000 dot com era was not happy. Valuations plummeted the funds couldn't get out, eventually either had to write off the holdings or sell them at huge discounts. However this time may be different-- these are more mature companies.
2. How much should one allocate to this as a % of "total US market"? My main concern is that the "US stock market" has changes from 20 years ago and so ideally one tries to best reflect what the total US market might be.
I would probably advise against that approach. 20 years ago, you had a lot of dot com rubbish that eventually got found out. OK 30 years ago maybe you had higher quality companies.

If you hold a small cap growth fund, you probably have a very similar factor weighting exposure to holding unquoted high growth companies.

I think in technology, though, the advantage has shifted to the big cos. Google Apple Facebook Amazon in particular. And they buy up private cos that threaten their business models.

The reality is if this is permanent and not cyclical, there's not much you can do about it. The Kaufman Foundation, which can invest in VC funds, wrote a rather humble report about their actual experience in so doing. Maybe we are lucky that we cannot.
3. A more broad question: Is it worth trying to get exposure to a broader set of private companies? Are there effective ways of doing this with a broad-based low cost approach?

thanks in advance.
There are some listed Private Equity vehicles, I believe? (Apollo, Blackstone - the management companies).

Generally though, I think one has to go with the quoted markets. What's there is what you can invest in, at reasonable cost.

fennewaldaj
Posts: 183
Joined: Sun Oct 22, 2017 11:30 pm

Re: delayed IPOs and investing in total US market

Post by fennewaldaj » Tue Mar 13, 2018 5:40 pm

Valuethinker wrote:
Tue Mar 13, 2018 3:24 pm

Don't you have to be an "accredited" investor from the perspective of the SEC? That may be the wrong US regulatory term.

I know Fidelity (anyone else) has put some of these stocks into some of these funds. My experience of this in the 2000 dot com era was not happy. Valuations plummeted the funds couldn't get out, eventually either had to write off the holdings or sell them at huge discounts. However this time may be different-- these are more mature companies.
You can buy shares in private companies as a non accredited investor. I actually own shares in a local private bank. I often wonder if these are the better kind of private equity to invest in than the VC and buyout types that everyone gets so excited about. I think it is just the non 40 act funds that do so that you can't invest in.

TropikThunder
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Re: delayed IPOs and investing in total US market

Post by TropikThunder » Tue Mar 13, 2018 11:07 pm

boglebrain wrote:
Mon Mar 12, 2018 8:01 pm
In the last 20 years there has been a significant shift where companies wait much longer before going public. This means that a disproportionate share of the "upside" is accrued to venture capital and private equity that is invests in these companies. You read about the private financing that companies like Uber, AirBnB, DoorDash, etc are getting and so when they eventually go IPO much of the gains will have already been give to private investors compared to how it used to be. Is this a cause for rethinking how one invests in the stock market?
I think that's a feature, not a bug. The private investors are the ones who took the risk, they should be the ones who garner the upside. I think what you're overlooking is that those companies were essentially worthless before private capital allowed them to grow to the point where an IPO made sense. Going from tiny start-up to IPO-worthy used to require bank financing, now it's increasingly private equity but the retail investor was never an early participant in that process to begin with.

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