This growth journey has become largely inaccessible to public market investors as companies are opting to stay private for longer
Today’s leading private growth companies are natural monopolies with sizable growth opportunities and deep competitive advantages. Many are growing 30-60 per cent annually, and some are among the 50 largest companies in the world.
This is symptomatic of the seismic shift that has occurred in the evolving landscape of growth investing. Traditionally, companies with more than $500 million market value would go public, allowing many types of investors to participate in their journey to hundred-billion-dollar valuations.
Today, this growth journey has become largely inaccessible to public market investors as companies are opting to stay private for longer.
This paradigm shift has created a vast and growing market of exceptional private companies, now numbering more than 1,500 valued at over $1 billion, with a combined market value exceeding $5 trillion. Enter a new asset class - private growth equity.
Overlooking an asset class
So far, private growth equity has been largely overlooked by investors in favour of traditional buyout or venture capital investing. This has led to the neglection of an asset class that has outperformed all others since 2010.
Why is this? Investors often overlook the possibility that exponential growth can continue long after companies grow larger and less risky. Generally, the human brain underestimates the power of exponential growth. If you could fold a piece of paper 42 times, it would be thick enough to reach the moon. Private companies growing revenue consistently by 30% per year can deliver the same wonder.
Another criticism is that private growth must be a bubble, with such big companies. But this idea misses the breadth of opportunities.
On the one hand, certain companies are large. But this reflects the size evolution of public companies over the last 20 years.
In 2004, the largest company in the world – General Electric – had a market value of $380 billion. At the end of 2024, the largest company in the world – Apple – had a market value of $3.5 trillion, and 10 companies were valued at over $1 trillion.
The upper limit in company size is 10 times higher today than it was 20 years ago. Future leaders could be even larger.
Choosing shareholders
Staying private for longer means private companies can carefully select shareholders who have a time horizon to support their future growth, and experience of owning companies while they scale.
Having aligned shareholders allows management to make bolder, longer-term investments in their businesses. For example, they can more easily forego short-term revenue to focus on something bigger, like SpaceX loading rockets with their own Starlink satellites instead of offering launch capacity to paying customers.
Lower loss rate
By the time a startup becomes a private growth company, it has overcome three big hurdles that lead to startup failure: product market fit, having the right team, and nearing profitability. Studying loss rates back to 1987 shows that only one in three companies in the private growth category returned less than the initial investment. For earlier venture capital, it rises to two in three companies.
Private growth companies have also demonstrated their ability to endure the intense market challenges of Covid in 2020, followed by the rate-hiking cycle of 2022, emerging leaner and more strategic.
No company demonstrates this better than Stripe, which has grown revenues six times since 2019 and 50 per cent since 2022, despite 1,000 layoffs in 2022 and a 50 per cent cut in valuation, helping the company become profitable in late 2024.
The focus on profitability marks a dramatic shift from 2020-2022 when companies had no clear timescale to achieve profit. Today, many growth-stage companies are embarking on a final funding round to achieve the scale that brings profitability. Once companies reach this milestone, their risk of failure falls substantially while the doors to IPO begin to open.
Reaching a trillion
The prospects are exciting. Take SpaceX for example, a private company valued at over $350 billion that can connect anyone in the world to the internet through its 7,000 Starlink satellites, with hundreds of billions of dollars of revenue potential.
Or Databricks, with a market value of $62 billion, which is becoming the cloud data solution of choice in an AI-enabled world. Or ByteDance, owner of TikTok, is valued at $3-400 billion despite generating similar revenue to Meta and growing faster.
Each of these companies could approach a $1 trillion market valuation – and generate exponential returns for investors.
Investing in these companies requires a long-term time horizon. But it should be a worthwhile opportunity.
Brian Kelly is an investment specialist and a member of the Private Companies Team. He joined Baillie Gifford in 2024. He graduated with a BSc in Mechanical Engineering from Brown University in 2008 and is a CFA Charterholder.
