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Bill Kelly explains why venture capital’s access to early-stage companies generates greater upside potential
Key Takeaways
- Private markets - particularly venture capital - offer access to companies at an earlier stage than public markets. This is where greater capital formation takes place, offering greater upside potential for investors.
- Selecting the right opportunities is, however, the challenge, with much wider dispersion of returns between the quartiles. If you don’t have the insight, or a partner that does, to select funds, then you’re better off buying cheap public market exposure.
- There are potentially huge opportunities in areas such as artificial intelligence, biotech, and medical innovation, but astute investors will be highly selective in gaining exposure.
Transcript
I'm Bill Kelly, the CEO of the CAIA Association. We're a global credentialing body focused on better outcomes for the end investor. We have about 14,000 members in over 100 different countries, and we've been at this about 21 years. And I think our very best days for the investor for our mission are ahead of us.
Equity risk premia is equity risk premia, and it doesn't know if it's public or private. But if you think about where value creation is happening, where capital formation is happening, it is a private market matter, full stop. And you can look at some of the data around companies with more than $100 billion in revenues; the vast majority of these opportunities are in the private markets. Companies used to have to go public because that's where you access to capital. But now we're seeing them stay private, maybe two times as long as they were staying private, maybe just a decade or so ago. And by the time they come public, a lot of value creation is happening or already happened. And the value proposition to the retail investor accessing it through the public markets has been more or less rinsed out.
So if you’re thinking about trying to participate in that earlier in the process, that's the place you've got to be. There's certainly the opportunity for an illiquidity premium, a complexity premium, but I think it's no more complicated than the fact that you can get into the capital formation stages much earlier in the private markets. Companies are staying private much longer, but there are risks involved. And I think many investors think about private equity as an asset class. And I think that in and of itself is a big mistake.
You look at the median returns to private equity; they look very, very similar to the public market proxy, but the dispersion of results from the median to that top quartile is separated by thousands of basis points. So, manager selection matters hugely. If you can't do it yourself, you've got to find a partner that can help you get there. And if you can't find a partner to help you get there, buy the public market beta as cheaply as you possibly can. So diversification comes with the work and with a lot of work, perhaps.
But then, even I think a lot of investors think about private equity again, not only as an asset class but even at the base level. It's much more complicated than that. There’s growth equity, there’s venture capital, early and late-stage VC, and each has its intended opportunities and risks. So along the private equity continuum, not that many years ago, you would have GPs and managers dedicated exclusively to maybe buy out, exclusively to growth, exclusively to venture capital. Those lines are becoming blurred, and even hedge funds are getting more involved in these opportunities as well.
But if you look at some of what we see going on in the world in generative AI and Chat GPT has been on the tongues of virtually everybody out there. The formation of that capital and the opportunities oftentimes begin in the early and late stage VC space, biotech and innovation and the last tail end of the baby boomers. And we think we can live into our hundreds. So medical innovations are going to be a huge opportunity as well. And again, you're going to see many of this in the early stage VC space. So thinking about this again by the opportunities, you can see they could be potentially enormous. But being able to pick through these and intelligently accessing these opportunities is what the astute investors should be thinking about.
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