Why the world’s biggest tech companies may never IPO again - Peter Singlehurst [Baillie Gifford]

0:00To get the shareholders you deserve, I strongly believe that. What you know about Elon Musk is that every couple of years, he will bet the house. He will put everything on black in his company. To grow the value of a company five times, you have to be a business that's willing to take risk. And so history tells us that any narrative that says China can't do X is wrong. Today on Billions, I'm sitting down with the man who built the most patient capital in Silicon Valley, Peter Singlehurst. He's built the private companies team from scratch at Bailey Gifford and deployed billions into more than 100 companies.

0:33His portfolio reads like a list of the most important private companies on the planet. Right now, he's arguing that public markets have largely lost their monopoly on liquidity and that the biggest companies in the world may never need to IPO at all. Peter, thanks a lot for being here. Thank you for having me. I'm curious, like how does a philosopher like yourself end up in private markets? Well, generous of you to call me a philosopher. So I studied philosophy at undergraduates and I did a master's in philosophy. And I sort of came within a hair's breadth of staying on and doing a PhD, but sort of swerved out at the last minute and sort of left me wondering what I should do.

1:18I didn't really know. but I heard about this company called Bailey Gifford and this thing called investment management and I thought well maybe that sort of sounds interesting and it turns out that I was lucky enough to have stumbled across this firm that was specifically looking to hire people to be investors who sort of barely knew what investing was who didn't have a background in finance and the reason for that wasn't just because Bailey Gifford was trying to be obtuse and different It's because they were trying to hire people who had maybe a different perspective, who hadn't been taught the same things as everybody else in finance.

1:56And so I was lucky enough to get a job within the firm. We hire graduates every single year. Most of the time they don't have finance backgrounds. That's a training scheme and a recruitment program that's been going for decades. and most of the partners within the firm such as myself started on this kind of graduate training scheme right back at the start of their careers and then stay within the firm their entire career so that's kind of how I stumbled into Bailey Gifford and how I stumbled into this industry now at that time Bailey Gifford was not doing private markets investing we were solely a public market growth equity investor.

2:38And there was a very simple reason for that. It's that if you're doing growth equity investing, you could do that in the public markets. You didn't need to do it in the private markets because companies went public when they were pretty young, pretty small. Amazon went public a few years after being founded in 1997. It had a market cap of$450 million. And then all that growth happened in the public markets. So BG was just doing public market investing. A few years into my time at Bailey Gifford, I was on one of our large public market growth teams and we started to see that there were these really big private companies and they were called unicorns and they were businesses like Airbnb, Spotify and we were like hang on this is a bit strange like what's going on here it seems like these companies are staying private for longer and at the same time like we were getting to know these companies they were sort of approaching us and we were kind of building our understanding of them and we were thinking these are the kinds of businesses we've always invested in why haven't we invested in them yet and I was lucky enough to be on a team where the senior investors were all taken up doing really important things like managing large public market portfolios so I was given some rope to go off and sort of proverbially hang myself looking at these companies and we started to realize that there was this really profound structural change that was happening in companies staying private longer and that it was beholden on us to be investing in these companies for our clients if we wanted to continue to give them exposure to the world's best growth stage companies.

4:00So I was kind of in the right time at the right place and at sort of ground zero of this change which has come to dominate private markets of companies staying for private for longer. So I kind of started doing our early sourcing of these businesses. I started helping to build up the infrastructure that we would need for investing in these companies. I founded the dedicated team in 2017. We launched our first fund in 2019. We really wanted to make sure we were good at doing this before we created dedicated funds around it. Since then, we've launched three funds. We've continued to scale up the team.

4:38We've been fortunate enough to find some really amazing companies, many of which are well-known, such as the ones that you mentioned, the kind of SpaceX's, you know, by dancers of this world, but a bunch of lesser known as well. But really, we're just trying to create these portfolios of the world's best growth stage companies, which is consistent with what we've done as an organization for over 100 years. It's just today, if you want to do growth equity investing, you've got to do it in the private markets and the public markets. So now I'm curious to understand because by trade, you started focusing, as you said, on public markets.

5:11Now you're getting like in earlier stage in private. So you're getting potentially like a higher upside, but also like a potentially higher risk. So how do you balance the two in terms of the portfolio and the global AUM that you have? So the slight point in your question that I would push back on is this notion that we're doing earlier stage companies. We're doing companies at the same stage that we've always done. It's just that they're private rather than going public. Let me bring it to life with an example. So we were fortunate enough to invest in Tesla in 2013 when it was a$3 billion market cap company.

5:56It had gone public a couple earlier,$2 billion. And because we were able to invest in it at$3 billion, the growth and the value that subsequently accrued up to north of a trillion dollars, we were able to capture that for all of our clients in the public markets, all of those clients that had it in their portfolios, which was a lot of them.

6:19So, SpaceX, we've been able to capture the upside in that for our private clients, but so far our public clients have not been able to capture it. Now, we actually invested in SpaceX later than we invested in Tesla. We invested in SpaceX for$30 billion valuation compared to three in Tesla. And so, I guess the point I make is actually it's the same kinds of companies. It's just that these companies are private rather than public. Now, there are some clients that we have that can only do public market investing, and that's actually the bulk of our clients. Within institutional asset allocators, there are often quite hard and fast delineations between the public team and the private team.

7:00And so most of our business and our business that we've been building for 118 years is in the public markets. But we've had a handful of clients that have been able to kind of come on this journey with us, investing in these high growth private companies. And they sit in a range of different kinds of funds. We have some blended public private funds. These are investment trust structures, predominantly based here in the UK. And then we have some dedicated pools of private capital. Now, one of those is an investment company structure. It's called the Chehalyan Fund. And then we have a few more traditionally structured private company funds that would look and feel a little bit more like what you would see in a sort of traditional private equity or growth equity managed fund.

7:44Ultimately, the journey we've been on is trying to convince our clients that, hey, if you want exposure to the world's best growth companies, you're going to have to do this in the public, in the private markets, as well as the public markets. And we've built up this capability over the last 14 years to do that. We've been in private growth equity markets for as long as they've been around. And so now we're really starting to see more and more of our clients saying they just can't afford to not be investing in high growth private markets. And because we have these longstanding trusted relationships in the public markets, it's kind of translating quite naturally into working with them on the private side as well.

8:23And one thing, you know, like I'm curious to hear your take on it. So whenever you invest in public markets, let's say like typically I have like millions of dollars that are like invested in public markets. Personally, I can leverage this to get debts and use this as a line on credit on many things. However, in a private company, I probably have like hundreds of millions invested. however if i want to put you know like my asset of private companies to get like leverage anywhere else it's almost impossible or at least like very hard so from the investor like you work with what's like your view on this and do you think it's gonna evolve because you were also talking about the fact that actually right now if you look at private markets back in the days they were almost zero liquidity.

9:16Now, if you take like, and real, and tropic, SpaceX, or whatever, it's trading almost in a similar way that you can see in public markets. So curious to like, hear from your perspective as an investor, how do you see private markets evolving? So it benefits a lot more like the investors and, and potentially the people, you know, like your LPs in your phone? Yeah. So I guess a couple of questions in there. I'll take the leverage one first and then maybe kind of how sort of secondary markets are evolving and some of those dynamics within private markets. So I think leverage can have an important but very specific place in portfolio construction and in finance.

10:03Where you have regular and predictable cash flows, I think that leverage can be amazing for ulcering returns on equity. And I'm still talking here more probably from within businesses than at that kind of portfolio level and borrowing against portfolios. But if we are shareholders in a company that's very profitable, leverage can be an amazing tool. So take Bending Spoons, for instance. It's a very profitable business. And they can use leverage very effectively to acquire new companies and de-lever very quickly as they start to get cash flows from those acquired businesses. However, if companies are not yet profitable or only at that early part of their journey in generating cash flow, I think leverage can be a very bad thing.

10:51So if so, most of our portfolio companies are not levered, actually, even most of those that are profitable are not levered. But if a company is not yet cash flow positive, unless there's a very specific reason, they should really not have debt within them. They should be a little bit more patient. They should be using equity to fund themselves because a little bit more dilution never killed a business, but debt kills businesses. And we've seen businesses be killed by debt companies that if they had not taken on debt could well have gone on, survived and thrived. But for a variety of reasons, they geared up, took on debt, and that debt came to kill those companies.

11:29So where we see companies that are cash flow positive, we're fairly relaxed about debt, provided there's good reason for it. However, where companies are either not yet profitable or that kind of more nascent stage of their journey and profitability, we really counsel companies to avoid using debt. Okay. Makes sense. On the broader private market dynamics, I think you need to separate primary and secondary capital within private growth equity markets. Because I think you're seeing two quite distinct pictures. On the primary side, so companies raising capital, going to investors, giving them full information and selecting a small number of partners that they want to work with as shareholders in their companies.

12:15I actually think this part of the market has become much more institutionalized, much more professional over the last 10 years. I would say actually specifically really since 2020 and 2021, there was a lot of hot money in those years. There were a lot of hedge funds. And what happened in 2022 is a lot of those market participants got really badly burnt and they left the market. And I think that's a really good thing. You want to see a rational, professional, institutionalized market in the growth stages of the private market. markets, as you see in many parts of the public markets. And you can see this in the financing rounds of some of the most prestigious companies.

12:51So if you talk about Andrewville, for instance, which we're shareholders in, if you look at some of their more recent rounds, they have skewed towards bringing in partners who are actually traditionally public market investors that are large asset allocators that have been doing this for a really long time and have that level of sophistication. And because they get to choose who their investors are, they bring in those institutional investors and they sort of say no to the uh uh sort of slightly hotter money should we say um so i actually feel pretty good about the standards the level of underwriting and the level of professionalization that you see within the primary parts of the private markets secondary markets are a little bit different um there you do see uh sort of slight fomo dynamics you will see people wanting to get access to companies where they actually don't even have information so they'll they'll know about a business by what they read in the press but no idea what financials are which plus is crazy like i have no idea how you could decide you want to invest in xyz company you've never seen a set of accounts of the business let alone spent time with the management team um so you do see some of that in the secondary markets there is more liquidity in the secondary markets and some of that's good like it can be useful for investors to be able to add to or reduce positions in secondary markets but what's not good is where you see investors coming into the secondary markets trying to get access to brand name companies where they don't know the management team they've not spent time with them they don't have access to financials and they're just kind of waiting to pay whatever valuation that that's out there that is worrying but like what's this behind that well what's this behind that is there's a cohort of amazing companies that only a very small number of institutions and investors can get access to like we're fortunate enough to be one of those we're fortunate enough to be one of those because we've been doing this for as long as this part of the market has existed but i do believe it's right that ordinary savers should be able to get access to these companies like it's it tesla creates a lot of wealth for ordinary investors spacex it's been much more difficult for those ordinary investors to get access to these kind of companies and so part of what we've tried to do is give ordinary investors access to those kind of companies and we do this from within these investment trust structures that i mentioned so the fund that we started doing that for uh was a fund in the uk called the scottish mortgage portfolio it's a 15 or so billion dollar fund don't quite quote me on that number it might be a little bit off uh and north of 30 percent of that fund is invested in private companies in 2019 we launched a dedicated fund called the shahalian fund uh which today it's just shy of two billion dollars in net asset value um anybody can go and buy shares in that company and they can get access to spacex uh byte dance bending spoons Databricks, Stripe, and Jurel, like I could go on and get access to those companies, you know, for as little as$2 if they want to buy a share.

15:55Very low management fees on that vehicle, freely tradable on the London Stock Exchange. And so, yeah, we found ways actually to sort of democratize access to some of these companies, but still do it in such a way where there is, you know, a high level of due diligence that goes into these companies where we are underwriting these companies with full information rise, full access into management. And so individual investors don't have to make spurious decisions about, hey, well, I'm just going to buy something in an SPV and I've got no idea what it is. They know that what's going into the Shahalian fund or Scottish mortgage has been underwritten to the highest level of professionalism and experience from doing growth equity investing for over 100 years.

16:38And I 100 % agree with what you're saying and the fact that you as like you know an investor with knowledge with access to the information you can make like this wise decision and you know invest globally have like this also like a portfolio kind of mindset so you have like I mean the risk is not only on one single asset however don't you think that from a psychological perspective I feel like investing in companies for many people is a bit like, you know, like buying a specific asset. So, I mean, in your case, whenever you buy into a fund and I've invested, you know, like in many funds, it's like I'm putting my money, I'm expecting a return and that's it.

17:30There is no real like emotional connection. So if the fund invests in an asset, I don't really feel like I own that asset even though I'm investor in a fund however if I like invest directly into like Entropics, SpaceX, Stripe whatever you know when I'm at dinners and people say hey like what's the latest investment you know it's it becomes something linked to your status and I think that what's make people feel good about investing because the moment something becomes a status you know it's like the same for people you know who love to buy fancy watches or whatever it's it's become something they are proud of and i think like investing in the next companies is something like quite excited for many so have you ever thought of it and is it something you think of from time to time like hey couldn't we maybe have like vehicles that are probably much cleaner than anything you could find on the market with third layers of whomever taking like fees on fees etc etc and just have uh you know like the the people investing a little bit more involved directly in a single asset yeah i i suppose in a way what you're alluding to there is that um we talk about investing as if it's one thing but maybe it's two things you know on the one hand maybe it's everything that you're talking about there which is you know the excitement of it the thrill of it the status of it.

18:56And then there's another thing which is solely focused on trying to make high returns over the long term. And sometimes those things can be the same thing and other times they can be very, very different. We're firmly focused on the latter. And to your question about sort of single asset vehicles and dedicated exposure to individual companies, I mean, this is something that we do for our institutional clients through the co-invests that we offer um and there again you're facing off with uh sort of professional institutions who have diversified portfolios who can be very informed again understanding with information about what to invest in and so there we will kind of offer that kind of single asset exposure whilst i think there's a lot to be said for the that kind of first use case that we're talking about the individual kind of excitement and sort of pride of owning particular companies that can also be quite ephemeral.

19:54So the company that can be the pride of everybody's portfolios today can very quickly fall out of favor for reasons that can actually have nothing to do with how the company is performing. And so I think that can be a little bit sort of more easy come, easy go, shall we say. And whilst I'm sure there are investment houses that will happily cater to that, I think one of the reasons that we've been able to survive as an institution for so long is because we focus on that camp of just trying to earn really high returns over the long term. And if people want access to our capabilities, they can absolutely do that in our funds.

20:28And we would hope that they would take pride in owning the funds and owning the underlying assets that sit beneath the funds, which are very much there to give them exposure to these companies, to enable them to make a lot of money over the long term if we do a good job for them. But I don't think you would see us chasing the sort of heat and excitement around particular areas unless we had very strong conviction that something was going to be a great investment and then you would see us express that through a large position in our portfolios. Yeah super super interesting and agree that it's really important to have one focus and obviously like you've done amazing so congrats on on that it reminds me of a conversation I had with Larry Ashbrook you know the founder of G squared where basically you know he was saying to your point that sometimes the shiniest assets are not the one that's going to return like the the best so for for example for him like i know that he actually lost money on uber and made money on lyft so it's like well right now you know when you look at both companies you could think like hey you investing in uber you should be like the the most the richest person on earth but sometimes it's not and i i'd like to uh to maybe like understand a bit better like because i think from a company's perspective you know like when whenever we looked at uh the past ipos something that happened is let's take for example clarna or like this kind of like companies or even figma and you know like the the ipods and eventually after that you know like you see the the stock like start tanking and it goes like quite badly for the company and it's uh it's it's pretty tough you know out there in in public market so do you think that uh as an investor uh you have like a better edge being like bailey gifford doing like both public and private do you think you have a better edge uh whenever you are like competing on deals because people would know that you are a long-term investor because whatever like and i think the public market doesn't really know that like if you take i don't know like anyone investing in public market can get excited at the ipo but what they don't know is that people usually have like a six month lockup period and after that after six months we often see you know like the stock tanking so retail start panicking and often you know like it's basically the people who are like retail not informed etc who will lose a lot of money on this because they would see something sinking and they would like start panicking so do you think because you have this kind of like really long-term strategy it's a it's a value add for companies and a competitive advantage or like how do you perceive it yeah so i think you're absolutely right um every edge that we have as a private growth equity investor stems from the structural integration between public and private growth equity investing within bailey gifford and you can sort of break that down across the different parts of investing that matter accessing companies analyzing those companies and then adding value to those companies.

23:44So on the access side, like, yes, the fact that we are a large public market investor is of unbelievable importance to our ability to access companies. And it also helps that we've been in this market, like for instance, existed. So like, you're a growth equity company, you know us, we know you, like that's sort of, We started to have our own kind of right to win and ability as well. But ultimately, the fact that we can be a partner of continuity from private and into public markets, the fact that our public market teams, should they decide and it's at their discretion, can conceivably write a billion dollar check in an IPO is something that a VC investor or a private only growth equity investor simply can't do.

24:34in a sense by working with bailey gifford you you are able to start de-risking your financial future as a business and you're able to start de-risking who the owners of your business are going to be over the very long term not just you know for this bit in private markets so it's of integral importance to our ability to access companies when it comes to analyzing those companies though and you know we look at a thousand businesses a year and we're trying to make 10 investments so we have to have a pretty good filtering system to say no to 990 and pick the best 10. Again, our ability to draw on our public market analytical infrastructure is really important to bring that to life a little bit.

25:16So we do all of our own research in-house. We never rely on consultants or anything like that. Our research in public and private markets, all done by investors at Bainfield. All of that research is stored in something that we call our research library, a piece of software. And in there, there are about 75, 80 ,000 proprietary research reports written by my colleagues over the course of the last 30, 40 years. I can go and draw on all of that in understanding the defense sector, if I'm looking at Andrel or looking at software roll-up stories, if I'm looking at Bending Spoons, or I can go and look at our early work on Meta, if I'm looking at ByteDance.

25:53I can draw on that institutional knowledge. And because people spend virtually their entire careers within this firm, I can probably also just go and speak to the person who wrote that research 15 years ago. They're probably just sitting a few meters away from me. And I can then draw those people into our research processes. So that kind of ability to draw on the information, but the institutional heritage around growth equity investing is really important in us then separating the wheat from the chaff and all the stuff that we've been able to access. And then in adding value to those companies, You know, because we know and care about public market governance, for instance, we can help companies get ready for being a public company.

26:30We can help them transition from an investor led board to an independent led board. We can help them establish an effective and palatable dual class share structure. We can help our private companies network within the thousand public businesses that we own. Like this is this is the crux of our competitive advantage. and it's structural. So it's, you know, we don't sit here saying, well, you know, we've got a competitive advantage because so-and-so is an amazing investor. We say we have a competitive advantage because we have this structure and that will outlive any individual investor at Bader Gifford.

27:04It will persist long after I'm gone. And ultimately that organizational edge, that organizational stability is what clients should really be underwriting when they are choosing partners in the private markets where you're sort of locked into a fund. You know, you can't just get out if you decide something's wrong. So it's something that's very important to us and something that we've been very intentional on building in to our private business, which is this kind of structural edge. Your second question was kind of about IPOs. And I think you're sort of trying to get like, what makes a good IPO versus a bad IPO?

27:40And what are the signs that you could look for us to tell whether an IPO is going to be effective or not? there's a truest answer to this which is like if a company is a great business it's probably going to have a good ipo and if it's a mediocre business it probably won't or it might for a bit and then get found out there's a little bit of a truism perhaps but what what might be a little bit more insightful than that slight than that slightly obvious answer so companies can choose to optimize for certain things when they come to the public markets um they can choose to optimize for price if they want.

28:17Get the highest possible price in an IPO. Minimize dilution from an IPO. Those IPOs usually end badly. Because if you optimize for price at the point of IPO, you're not really leaving enough on the table for new investors coming in to have a good experience. You're not building trust with the public markets. And trust is so important, both in public and private markets. But I think people really undervalue it as a currency in the public markets. or you can optimize for the quality of your partners. Now that might mean that you don't get the highest possible price on the day the IPO opens, but it might mean that you get investors that can be with you for the journey, that can support you in difficult times, where by leaving a little bit of value on the table, you can make sure those investors have a good experience, which makes them more likely to help and support you in the future.

29:13Something I often tell our portfolio companies as they come to the public market is that an IPO roadshow is about is yes certainly about attracting the right kind of investors but it's also about putting off the wrong kind of investors yeah there's a I think this buffer who says like you get the shareholders you deserve I strongly believe that and if you look at the shareholder registers of it take a business like Amazon for much of its history it actually had a very stable group of long-term investors that stuck with it at the top of its cap table throughout its journey. And there's an argument to be made that a stable, strong, supportive investor base can be part of a company's competitive advantage.

29:54And so to answer the question briefly, what is it that we like to see companies do in IPOs? We like to see them optimizing for the right kinds of partners, the quality of the investor, not optimizing for valuation in IPOs. Super interesting. And I want to continue on that topic and take the couple of examples. you mentioned uh do you think that uh for amazon because amazon basically was criticized a lot when it entered like the the public market because it was uh not um profitable at the time and i think back then it was not as common as it is now to have companies losing so much money so i think like at the time it required people with um with a certain mindset you know like a long-term thinker that the company would actually become what it is today.

30:46And I want to make the parallel with SpaceX. So if you look at the valuation of SpaceX versus the revenue, and you look at the revenue multiple, I think they're at like 18 billion or something like this in revenue and potentially want to IPO at like 1.75 trillion. It's not like it's numbers on the press or this kind of thing. So it's not super accurate, like we don't know yet, but it's what we see. So what's kind of your vision on how do you value a company? And also, do you think that these companies who have extremely big long-term bets can actually attract investors who are here a lot more for the long term and not just trying to make a quick buck on an IPO opportunity that they see and where they can kind of like play with public markets.

31:42Yeah. Yeah, so I think the first thing to say is that when you invest in a company, you need to understand how a founder is going to run a business, what they will optimize for, and the kind of risks they go to take and underwrite within their company. So we first invested in Amazon in 2004, 2004, but I can't take any credit for that. But I think it was actually very clear at that point in time how Jeff Bezos was going to run the company. And it was very clear because you could just go and read his shareholder letter from when he IPO. And again, this is something going back to the previous question.

32:18I think when founders very clearly communicate how they will run their business and the things they will optimize for in an IPO, in an IPO letter, I think is actually very effective. What did Bezos say? He said that he was going to run Amazon to optimize for long-term free cash flow per share. And it was also very clear that sometimes that would mean taking bets that had low probability payoffs, but high impact payoffs. So where the magnitude of the payoff would more than outweigh the low probability. That's what he did. He did that consistently. I think Musk is actually pretty similar in terms of how he runs his businesses.

32:58what you know about elon musk is that every couple of years he will bet the house he will you know put everything on black in his companies and we saw him do that time and time again in tesla uh you know whether it was you know going through production hell kind of scaling up the model y uh we and we've seen him do it in spacex as well you know initially it was launching rockets then it was reusable rockets it was betting the house on reusable rockets uh then it was starlink betting the house on starlink and then starship betting the house on starship so and now it's the next generation which is saying hey you know maybe we can do orbital data sectors and he's not going to take that bet half-hearted so if you're going to own these companies you need to know the kind of way in which they will be operated and how the founders of those businesses will take risk and if you don't like that and you don't want founders they're going to take risk in that kind of way.

33:58It's fine. Just don't own them. Just don't invest in them.