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Why investors should not ignore unlisted companies

Why investors should not ignore unlisted companies
April 14, 2020 by Tom Bailey, Money Observer

Stock markets connect the monetary savings of a society with companies in need of capital to invest and grow. At its best, this allows businesses to expand, powering economic growth and prosperity while providing savers with a return on their money.

Historically, the fund management industry has acted as a successful mediator of this process. Funds, being pools of investment, allow investors access to more diversified holdings, while managers do the research and stockpicking.

In recent years, however, a troubling trend has emerged: the decline of public markets. In the US, the number of initial public offerings (IPOs) has fallen from an average of 300 per year between 1980 and 2000 to just 100 between 2000 and 2017…

Similar trends are afoot in the UK…

This clearly presents a challenge for private investors. With companies staying private for longer or not going public at all, there are fewer profitable places for the investing public to put its savings…

Investors, therefore, must keep in mind that such exposure to unlisted firms via investment trusts should form only a small part of their portfolio. Importantly, also, unlisted companies and start-up companies are not synonymous – particularly now that companies are staying private for longer – and there are much less risky ways to access unlisted businesses…

One example of a trust focused on unlisted companies that doesn’t provide early-stage growth capital is Merian Chrysalis (MERI)…

Other options also exist. As James Carthew, head of investment company research at QuotedData, points out: “The vast bulk of listed private equity funds are focused on buyouts. Some, such as HG Capital, make investments directly. Others, such as Standard Life Private Equity and HarbourVest, are funds of funds. These invest in limited partnership vehicles which, in turn, make direct private equity investments.”

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