In the world of fintech, a lot excitement was caused by the announcement at the end of last year that Klarna, a European-headquartered leader in point of sale (“buy now pay later”) lending, had filed for an IPO. Some people saw this as the end of the fintech winter. Others lamented the fact that Klarna was looking to the US for its IPO — another sign of Europe’s lagging status in tech and capital markets. But a lot of the buzz came simply because IPOs are in themselves such a rarity these days.
In 2023, there were 154 IPOs on the Nasdaq and New York stock exchanges, with companies raising $24bn in aggregate. That was the fourth lowest number of IPOs in the last 30 years and marked the second worst year since 2009, when the world was still experiencing the fallout from the financial crisis — and even then gross proceeds, at $63bn, far eclipsed 2023, with bumper IPOs from Uber, Lyft, Pinterest and others.
Data from Statista and Stock Analysis — last 40 years
It’s tempting to say that the last few years have been a blip. IPOs are cyclical in nature for sure and, with interest rates falling (for now) and animal spirits returning, there will be a rebound in 2025. Moreover, the historically important IPO centres such as London and Hong Kong are losing ground to other locations, notably China and India. However, abstracting away from geographical moves and cyclical highs and lows, what you observe is a secular shift. Fewer companies are going public and the number of publicly listed stocks is shrinking — since 2000 in the US, the number of listed stocks has almost halved, to a little over 4,000.
In contrast, in secondary markets, 2023 was the second-best year ever, with the total volume of secondary transactions hitting $112bn. This might not seem surprising: if public markets are subdued, it stands to reason that GPs and LPs might seek greater liquidity through secondary transactions. However, what is perhaps more surprising is that the secondary market has grown even in bumper years for IPOs, such as 2021. Today, secondaries represent 8% of the PE market — up from 3% in 2000.
Graph taken from Preqin’s Global Equity Report 2024
We know that companies are staying private for longer, able to raise much more from private equity markets (where AUM has more than doubled in just the last 5 years). What is new is the deepening secondary liquidity pools. If companies and their investors can tap secondary markets for liquidity as and when they need — with shrinking discounts to NAVs — it begs the question: why would most companies ever bother to IPO?
Why do companies go public?
Historically, companies went public to raise money for growth. They raised primary capital to build new factories, to invest in R&D, to expand overseas, to make acquisitions, and so on. Today, the majority of money raised in IPOs doesn’t go to the companies, but goes to investors.
What changed? The most obvious change is that private equity and private debt play the role that public markets played historically. The size of the PE market today is $7.2trillion. Since 2000, when the number of listed companies in the US has halved, the private equity market has increased 20-fold. Over that time, the market has grown in depth and sophistication, with the formation of firms specialising at every point in the capital raising cycle — pre-seed, seed, series A, etc, able to evaluate the quality of companies, make fast investment decisions, and deploy large sums of money.
Graph taken from Preqin’s Global Equity Report 2024
However, even as private markets started to displace public markets as the principal source of primary capital, public markets remained a key source — the default source for megacaps — for early and/or majority-owning private equity investors to liquidate their holding.
But, this role of public markets is also shrinking in importance.
First of all, private equity-owned companies are increasingly being sold to other private equity companies, reducing the need for IPOs to recycle the capital table and free up liquidity. In fact, over the last 5 years, the average yearly value of companies being sold by one PE firm to another is just over $850bn, which is over 3 times the average yearly value raised through IPOs over the same period.
Second, as money increasingly flows to passive, not active funds, the money available for IPOs reduces. Only 37 per cent of US equity fund assets are now actively managed, down from 60 per cent in 2015. Passive funds have many advantages, such as lower fees, but they rarely take participate in new issues, contributing to shrinking markets.
Thirdly, secondary markets are getting deeper and more liquid.
A screenshot from Caplight, showing volume of transaction in liquid names like SpaceX
The growing size and importance of secondary platforms
Secondary markets are growing in size.
As a result of this improved liquidity, the discounts to Net Asset Value (NAV) are also coming down.
So, if you’re a private company, you can now raise primary capital through private markets, and either bring liquidity to your investors and employees through a private sale or via secondary platforms.
As a result, the major reason to list has become much less compelling — especially when one takes into consideration the cost of listing.
According to PwC and LSEG, the cost to IPO represents about 10–15% of gross proceeds in the US (see breakdown below) and around 8 to 12% in Europe. In addition, the ongoing costs of being a listed company — not borne by their privately held peers — is estimated to be on average over $1m a year.
Plus, there are other downsides of being listed, beyond the cost, such as increased investor scrutiny and short-termism. Elon Musk’s remarks are quite elucidating in this regard. In relation to Tesla, he has often complained about the pressures on listed firms (“the short term demands of quarterly earnings reports can be a major distraction from executing on long-term objectives”), has lost his temper with analysts on conference calls (“Boring bonehead questions are not cool”) and flirted with the idea of taking Tesla private (“Am considering taking Tesla private at $420. Funding secured”). In contrast, he says that at SpaceX they never think about quarters and have no intention of taking it public.
In the case of SpaceX specifically, why would you take a company public when you can achieve a valuation of $350 billion on private markets (Dec 24), when you can do $800m follow-on raises through private markets (Jan 23) and where your employees can liquidate $1.25bn through a secondary sale (Dec 24)?
And the same could be said of so many companies — OpenAI, Anthropic, Stripe, Revolut etc.
Implications for companies and investors
The factors that are causing more funds to flow to private markets — primary and secondary — are self-reinforcing and likely to underpin further growth in private markets.
- Companies will continue to stay private for longer: able to raise more money to fund their growth without the cost and scrutiny of a public listing.
- Secondary markets will continue to grow: with more companies staying private for longer, there will be more interest from investors to access these names as well as more interest from existing investors and employees to liquidate their long-held holdings.
- VC and PE will continue to grow as an asset class: if companies stay private for longer, more value will be generated before — or even if — these companies go public, meaning money and returns will continue to flow to VC and PE funds to capitalise on these returns. Furthermore, as the secondary market continues to grow and early investors are better able to liquidate their holdings, this reduces the liquidity discount on private equity investment, improving returns and flows.
- Public markets will continue to shrink: with private equity AUM growing, there will be more money for PE firms to delist public companies, as well as more money for PE firms to sell firms between each other. In addition, with fewer incentives to go public, and more primary and secondary funding coming from private markets, fewer companies will go public, shrinking the public market investable universe.
- New products will emerge to capture growing interest in investing in later-stage private companies: for most investors, investing in VC — and especially PE — funds is inaccessible: the entry tickets and the time to liquidity are too high. However, interest levels are rising, as people see the value that is being created by high-profile companies not listed on public markets. Take generative AI. If an investor wants exposure to this trend, outside of Microsoft and Nvidia, the best placed companies are all in private hands.
Products will emerge to address this unmet need, and early movers will capture a large market share.
Based on Stableton analysis, using data from Pitchbook and Morningstar
Stableton’s Unicorn Top 20 Strategy
Stableton is one such company moving to address this need. Based out of Zurich, Stableton is an investment firm focused on pre-IPO investing. While initially starting with a broader investment scope, over the past four years, it has exclusively focused on growth equity and pre-IPO investing, leveraging the growing secondary market for shares in the leading private growth companies.
Today, Stableton provides a fund systematically investing in the top 20 most valuable and most-liquid venture capital-funded private technology companies. The diversified, low-cost, and institutional-grade portfolio includes pre-IPO stage companies such as Revolut, OpenAI, SpaceX, Databricks, and Discord. Stableton has quickly become the go-to partner for pre-IPO investing for banks, wealth managers, family offices, and forward-thinking institutional investors who want to participate in the growth of these leading private companies.
The constituents of the Top 20 Unicorn Strategy- Jan 2024
The product has several interesting characteristics:
- It is a passive, index-based, bank-grade strategy. Stableton has partnered with Morningstar Indexes to develop the Morningstar PitchBook Unicorn Select 20 Index, which defines the allocation of the products, and investors can invest via a Luxembourgish fund and a Guernsey AMC.
- It is semi-liquid. Unlike investing in a PE or VC fund, investors can liquidate their positions with ongoing redemption possibilities at NAV.
- It is a low-cost product. As expected from a passive fund, the management costs are low, and unlike VC and PE funds, there is no carry.
In short, then, the Unicorn Index gives investors low-cost exposure to a diversified set of high-growth private companies, without carry and without a long lock-up period. It’s a great fund for any investor to have as part of a high-return, balanced portfolio, as well as an excellent entry-level product for an investor who is new to private equity investing.
Stableton’s defensibility and growth trajectory
On the face of it, the Stableton fund seems simple and easy to replicate. However, like so many manifestations of simplicity, the Unicorn Top 20 strategy solves for great underlying complexity.
When buying private company shares through secondary platforms like Forge, you still face the complexities beneath the surface. Getting accurate information about these shares is challenging for three main reasons:
- private companies don’t have to publicly disclose their financial information, making it hard to evaluate their true worth;
- these companies often have multiple share classes with varying rights and restrictions; and,
- ultimately, these information gaps create significant counterparty risk, as buyers must largely trust the seller’s representations without the benefit of transparent market data or standardized due diligence.
In order to make the fund institutional-grade, Stableton conducts a significant amount of work, conducting in-depth due diligence on the underlying shares, terms, and counterparties, ensuring accurate secondary market pricing, and complying with regulation. In addition, it has invested in, and maintains, a scalable and transparent vehicle infrastructure, leveraging best-in-class third-party infrastructure such as fundcraft for fund operations and Caplight for pricing. This is all unseen to the end client, who buys a straightforward fund investment.
In terms of growth prospects, the product boasts powerful two-sided and data network effects, which improve the product as clients and volume grow, deepening the moat, as well as unleashing faster growth. These extend from simply deepening pools of supply and demand to being able to get better data that translates into better due diligence and better pricing.
A European Vanguard for private markets
While Europe has traditionally lagged in producing fund management leaders, Stableton, a promising contender emerging from Switzerland, applies Vanguard’s successful index-based approach to private markets. Although public markets currently dwarf private markets by a factor of 20, ongoing secular trends suggest this gap will shrink significantly in the coming years. This expanding opportunity, combined with Stableton’s innovative approach, makes it a compelling company to watch in the investment management landscape.
Disclaimer: Stableton is an Aperture marketing client and a portfolio company. The information provided in this blog is for informational purposes only and should not be considered as investment advice. Before making any investment decisions, please consult with a qualified financial advisor to assess your individual circumstances. Investing involves risk, including the potential loss of principal.
