Would Tesla come to public markets in today’s fundraising environment with a less than $3bn market capitalisation?
The answer to that question is “probably not”, according to Baillie Gifford’s Ben James, a director and investment specialist for US equities at the investment manager.
The growing trend of large and profitable businesses shunning public markets in favour of staying private is a major reason why Baillie Gifford is seeking to expand its growth equity business.
“Companies are able to scale privately because of the extra capital in private markets and get to a big size without public markets,” James told FSA in an interview.
He pointed to the massive size of private companies which Baillie Gifford has invested in: fintech firm Stripe remains private despite its $91bn market value and Space X has reached a whopping $350bn in size based on its most recent funding round.
However, James said investors can still find public opportunities, highlighting the firm’s investment into publicly-listed US salad chain Sweetgreen, which rose over 180% during 2024.
“But having exposure to private markets is really important for investors, and it is a strategic priority for our business,” he said. “We think the growth equity, private equity asset class is here to stay.”
He added: “It’s really helpful for our public equity business – our private team is two desks down from the public US growth team and they sit in between the international growth team, regularly discussing ideas.”
“It is irresponsible for public equity investors not to have insight into what’s coming,” he said. “Because of this growth in the private asset base, about half of our [public] portfolio in the US growth team was either researched or invested in when private.”
Sceptics might argue that this is just another case of a public equity investment manager chasing after higher fees associated with private markets.
Fee structures in private equity investments can be incredibly lucrative for asset managers, especially if they follow the traditional 2% annual management fee alongside a 20% carry.
James argues that unlike some other asset managers, Baillie Gifford passes on the benefits of scale to its clients – pointing to ongoing charges of 0.35% for the firm’s flagship Scottish Mortgage investment trust.
“If a fund gets bigger, we try to pass on the benefits of scale to clients,” he said. “With private companies, we try to be fair, we charge 1% and 10%, and only charge on invested capital, not committed.”
He also believes the firm has an advantage in its access to the best quality private companies, who often get the benefit of choosing their shareholder register.
“Yes, we may only write a check of $100 million but if and when you come to market, there’s this huge asset base of public equity that could be interested in being a long-term shareholder.”
