The case for private growth equity

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Brian Kelly (BK): All right, thank you for joining our Private Companies webinar. I’m Brian Kelly. I’m joined by Rachael Callaghan.

Rachael Callaghan (RC): Good morning, and good afternoon, everyone.

BK: We are both private company investment specialists here at Baillie Gifford. Our goal today, with this webinar, is to shed some more light on the growth equity asset class. One of the things we’ve observed in calls and conversations with clients is that growths can often be bucketed either between or within buyout and venture, and, when doing so, it can be somewhat misunderstood when thought of in those terms.

And so what we’d love to do is just spend a moment on the asset class history and features, and address how we think about some of the common criticisms of the asset class that we hear from allocators, and then talk through the opportunity that we see in the asset class, going forward. So with that, I will kick it over to Rachael, and she will get us started with the definition and history. 

RC: Great, thanks, Brian. So, good morning, and good afternoon, everybody. We thought it’d be helpful to start by clarifying our definition of growth equity to frame the discussion of today’s webinar, as I know that growth equity can often mean different things to different people. So, our definition of growth equity is best framed by the lifecycle of a company, and you’ve got an S curve on the page, here. At Baillie Gifford, we are investing at the artificial infection point when a great product becomes a great business. 

Now, every company starts out as an idea that is ultimately iterated on until it becomes a product or a service, and the evolution of an idea to a product is the domain of the early-stage venture capitalist. They are experts in product development and company formation. But once the product or service has scaled into a company, a new tool kit and a new playbook is needed. Growth companies require robust business models where gross margins can scale into attractive net income margins. And the focus at this stage shifts towards things like governance, enduring growth and profitability at a valuation ultimately public markets would embrace.

Now, we’ve got some tangible guardrails that are noted on this page, things like a minimum EV of $500m, $50m of revenues, and growing those revenues at 35 per cent year over year. They are on a pathway to profitability, these companies, or are already profitable. And then, we have some of those intangible factors noted in the graph as well, things like culture, competitive advantage, and the ambition of these companies, that will ultimately drive their outlier growth potential. So, that’s what it means to us at Baillie Gifford.

And so, next slide, please, Brian. Thank you. I think it’s fair to say that the growth equity asset class is the relatively new kid on the block, arguably being established only about 15 years ago, as a result of the fundamental shift in how companies capitalise themselves. Pre-global financial crisis, on the left-hand side of this graph, you can see that companies really didn’t raise that much money privately. The biggest fundraiser was PayPal, which raised $215m before its IPO in 2002. And companies began to stay private for longer, and as we go through today’s webinar, we’ll cover off some of the reasons behind that, but you can see that, in contrast to the $9m raised by Amazon or the $35m raised by Alphabet, Facebook raised over $10bn, many multiples of the amounts raised by both Amazon and Alphabet. 

And this growth of these companies now accrues to the private shareholders and not the public market owners, which is the main reason why we, at Baillie Gifford, started investing in this space on behalf of our clients 13 years ago. And you can see on the right-hand side of that graph that some of the companies raising at scale today really showing that that trend of companies staying private for longer is here to stay. And we’ll now think a little bit about why that is.

And the first reason is that capital markets have changed. Companies staying private for longer is partly a function of indexation, and you can see that on the left-hand side of this slide. Historically, there was a deep market of mutual funds looking to buy IPOs and hold them as they scaled into large growth companies. But over the past ten years of so, $3tn has flowed out of active mutual funds, and today 60 per cent of the market is now in indices, and so companies have to grow that bit larger and reach that scale before the IPO to make sure that they attract the capital from the indices and are well-received in public markets.

And the second reason that we’ve got on this page is slightly more intangible, and that is the better alignment with shareholders. And companies can, in some cases, build better businesses by virtue of remaining private that little bit longer. The alignment in the shareholder base allows companies to take those longer-term decision that come at the expense of short-term results. 

And we’ve got two examples on this page. And the first is making bold acquisitions to cement that leadership within an industry. And the example on the slide is Snowflake and Databricks. Both are giants in the data storage and analytics space, leveraging artificial intelligence. Databricks has remained private a bit longer than Snowflake and has made several multi-billion-dollar acquisitions along the way, which has really helped cement its leadership within the AI, cloud and database space.

And then on the right-hand side of this page we have an example of funding lossmaking growth to help entrench that competitive advantage, sacrificing those short-term revenues for ultimately long-term, enduring growth. 

And the example here that comes to mind is SpaceX, which is the rocket-launch and communications infrastructure business, through its Starlink platform. The primary business is to launch payloads into space, but, over the last decade or so, they’ve sacrificed short-term revenues by launching their own Starlink satellites into space instead of having those third-party payloads on board. So they haven’t maximised revenues or cash flows in the short term, instead making the decision to establish the Starlink constellation their priority, which will drive revenues for SpaceX and profits over the longer term.

BK: Just in summary, private growth is a new asset class. More of this growth is now captured by private investors as opposed to public investors, where this growth used to occur. And the reason is due to indexation and due to better alignment. That’s why we kind of believe this is going to be an entrenched asset class. So I’ll hand it back to Rachael, here, for asset class features.

RC: Thank you. So, the first message is it’s not too late. There is an assumption that these companies can’t get any bigger from here, but we really see exponential growth, particularly in the revenue growth that we’ve got on the left-hand side here, companies showing venture-like returns, even at the growth stages. So Wise, there, growing 75 times its revenues, and ByteDance 23 times. And it’s worth noting that the starting point for those ByteDance revenues was in the billions of dollars, and today it’s grown its revenues to over 150 billion revenues. So really, that scale can be enduring.

And returns in this asset class are fuelled by growth. We can see, here, that broad portfolios don’t have significant forecasted growth. On the far right-hand side, we’ve got the Bloomberg data on the ACWI index. The next 12-month growth forecast is only 1 per cent. And in buyout, it’s not much better, it’s only 6 per cent. But of course, it’s worth noting here that buyout has other levers for growth, value-add and operational involvement, but the growth isn’t really coming from revenues. And it is the revenue growth rates that can power return for clients, and you can see here that it’s 84 per cent for our portfolio at Baillie Gifford.

And then, if we look at the next slide, we’re looking at the risk-return profile, which is also compelling. There is that venture-like upside that we spoke about earlier, without the venture-like loss. For completeness, the loss ratio is calculated by the amount of companies that don’t return the amount you invested. So with lower loss ratios within growth equity, you can return lower on the investments that work to generate the same portfolio returns.

And last but not least, one of the most exciting things about mine and Brian’s job is the companies, the exceptional companies that exist within this asset class. We’ve got a rocket, here, that often symbolises the venture capital industry, with its rocket emoji, but it makes sense here to touch on SpaceX. We’ve already mentioned it today, but as the world’s largest venture-backed private company, it’s worth spending another moment on.

It's got a global monopoly on rocket-launch. Over the last 15 years, they’ve enjoyed a 99 per cent success rate, delivering payloads into space. There is no other that comes close to those metrics, but while simultaneously it’s created its Starlink satellite business, with thousands of satellites into space, which generate recurring revenues in the billions of dollars for SpaceX.

But there are also lesser-known companies with equally as exciting growth potential. If we think about a company like Bending Spoons, based in Milan in Italy, it acquires digital product companies with a view to improving their underlying products, monetisation and growth. Some of its recent acquisitions include apps like Evernote, Splice and WeTransfer in Europe. It has a very similar business model to a publicly-listed company Constellation Software, for those that are familiar with that, which is valued at many multiples more than Bending Spoons is today. But Bending Spoons has grown at a CAGR of 130 per cent, and we got to invest in that company at a very compelling price.

So to summarise some of the features of the asset class, we have a really compelling risk-return profile for clients, with potential outsized returns largely driven by that revenue growth. And really exciting, exceptional companies that operate within this ecosystem that will be the household names of today and, ultimately, tomorrow. So with that, I’ll hand over to Brian to lead the next part of the webinar.

BK: Thanks, Rachael. So, the next section here is something we’ve put together based on conversations we’ve had with clients. I think so many conversations demonstrate the misunderstanding of the asset class. I think if we can reframe them through this section, we can help investors think about some of the criticisms as actually being positives of the asset class.

So, one of the first ones that we often hear, when talking with clients, is that I don’t want non-control in private equity. I’d rather have buyout, I’d rather have venture, I’d rather have these investments where I can have control and manipulate the outcome to drive returns as an investor. We think about this a little bit differently. And one of the ways we’ve done this is reframe non-control as positive selection bias.

Our goal, at Baillie Gifford and this programme, is to own the best companies in the world, the best private companies in the world. And this chart on the left is maybe not that fair, but if, in the public markets, you limited yourself to companies that you had control of or placed limits on governance or didn’t own the best companies, you’d have missed out on so much of the market’s return, driven by seven exceptional founder-led companies.

The same applies to the private company ecosystem. The best private companies in the world don’t cede control. There’s no way you’d get Daniel Ek or Brian Chesky to cede control of their company and let us run it as shareholders. They’re going to run it themselves. So philosophically, that’s one side of it, thinking about this as it’s actually a positive, because the best companies don’t want to give up control.

The other mitigants here, there are several. I think the first one is there’s this asymmetry of returns, so if you have buyout or you have… Buyout’s probably the best example. Maybe there’s more control over having a 2X outcome because you can manipulate those returns, but you don’t have the upside asymmetry of a 10X or a 20X result. And so that’s part of what you’re looking for in growth, you’re looking for this asymmetry. It gives you a totally different return profile.

The next two are more structural. With every investment that we make a Baillie Gifford, we’re always looking for information rights. This is a critical component, because without it we can’t make a decision on what to do next with the company. Maybe we should be adding more in the next round, maybe we should be guiding the next raise at a different price, maybe we should be telling the company to slow down raising more capital, or do something with different structures. But information is critical in knowing what to do, and it’s also a very big differentiator between what we do and something like secondaries, where you might invest in a company at a great price, but you don’t have that information rights.

The other feature of this asset class that can mitigate the lack of control is the preference structure. So, the preference structure allows you to recapture more of the company’s assets if something goes wrong. It’s just a help. Really, what we’re shooting for is the upside asymmetry here, but the preference structure does give some downside protection.

Other features, we can still have an outsize voice, even if we’re not a controlling shareholder. We find that so many companies are really keen on our advice that we give and how we think about raising capital, timing of IPO, the structure of the different capital that they do raise. All of that means that we can still have a pretty strong say in the company’s trajectory and help them on their path.

The other aspect here is that even if you don’t have control, you can still have a lot of value to these companies. And this is also something to help reframe private growth. You need a growth-appropriate value-add that is not what you get in buyout, it’s not what you have in venture. This is really what do companies need most at this growth stage? And we bring founders and board members and CFOs together. What we hear most often is that they’re looking for help with the IPO, they’re looking to transition their governance, their board, to the best governance and board that they can have. That’s what we see from the largest public companies today. 

And then, we can also help with things like capital markets, financings or introductions to other board members or C suite. So in summary, there’s a lot of things you can do as a non-control investor, and it actually does mean you end up owning better companies, because you’re not only focused on the ones you can take control of.

The next criticism of this asset class is arguably a fair one, which is if you could invest in bio and pay 12 to 14 times cash flow, why would you want to invest in growth and pay 20 times revenue or higher? And what we’ve done here is we’ve tried to look at valuations, first, in the lens of public markets and say, if you look at an unprofitable public company, public growth company, the only way you can really value that is on revenues. And looking at this cohort of public companies, these happen to be larger software companies, so many of these companies, if you draw a trend line through growth versus revenue multiple, as soon as you get to about a 30 per cent growth rate, the public market is pricing these companies right around 20 times revenue.

And so this is, I think, the first thing to consider, that when you look at our best market-leading monopoly companies in our portfolio, those are priced, generally, around 20 times trailing revenue. Also, fun fact, this chart on the left is next 12 months, we’re typically investing… On the right, I’ve shown trailing revenue for these private growth leaders, but the first one, we’re not going to give the names here, just given some of these metrics are private, but you can probably infer the first one is a large, global space and data monopoly company. When it’s valued at 30 times revenue, what that fails to take into consideration is that the revenue, as Rachael mentioned, you’re not capturing all the revenue it could generate. They could maximise revenue by putting more third-party-paying payloads in their rockets.

Another feature of this company is that, over the next two years, they could generate $30bn more revenue just by turning on more Starlink subscribers. And I guess I’ve given away some more of this company’s background, but it’s $1bn for every million subscribers, so the revenue multiple’s almost inconsequential when you think of the future growth that they can generate as they launch their business.

The next one is a leader in AI and data centres. And valued at 26 times revenue and growing 60 per cent year over year, you could almost argue that that’s cheap compared to other AI companies. And the third one is in defence. 20 times revenue trailing, but it’s growing 100 per cent year over year. That one, this third one here, the private growth leaders, that one is in that Palantir, PayPal Mafia ecosystem, and I think when we think about valuing private companies, you do have to think of what do those companies trade for in the public markets. 

If you look at the scatterplot on the left, that outlier dot there, at 50 times revenue, is Palantir. So we’re not forecasting a Palantir-type company to trade at 50 times revenue, we’ve underwritten that to 40 times gross profit, but you’ve still got to show that you need to be mindful of public market valuations when pricing a private growth company.

So that’s the extensive private growth companies. I think we can justify that they’re not that expensive versus public companies, and just as a function of the growth potential they have, going forward. There’s a whole other category of private companies that are off the beaten path that are very often boot-strapped, meaning they’re growing within their own existing cash flows. Rachael mentioned Bending Spoons. They never raised any money from the $40,000 that they started with until they grew to $1bn of market cap.

We’ve invested in a handful of these companies. One of them is a drone company based in Portugal, priced at market multiple of earnings 16 times P/E, growing 50 per cent year over year. The other is a Brazilian FinTech, again priced at buyout-type multiples, but growing 60 per cent to 70 per cent year over year. This one’s interested because their product, their financial product, enables their customers to double their earned income because they’re helping those customers with their mobility. So really exciting company, a really great feature is that it brings its customers really amazing prices.

The last thing here is that there’s also value opportunities in the private growth space as well. We own a social media company, same size as Facebook in terms of number of users, in terms of their amount of revenue, but it’s priced at an 80 per cent discount to Facebook. When we first bought it, we were paying 1 time revenue. Today, I think it’s priced at two times revenue. You can see it’s exceptionally cheap. If this company where to trade at the valuations or the multiples of their peers, like Meituan or Tencent, there’s still 3X to 5X upside from here.

So it’s just helpful to think that this private growth ecosystem is not just very expensive AI companies, it’s not just SpaceX at 30 times revenue. The revenue multiple makes sense if you think about future growth, and there are so many opportunities here that are actually quite cheap, or even cheaper than public markets, with exceptional growth potential. So that’s the piece on valuations.

The next concern about private growth companies is that they’re just too large. And I think we put this chart together just to show that at every stage in a company’s lifecycle, there’s still exponential growth potential. So, in fairness, as you get larger, there are fewer companies that are capable of these exponential returns, but the reality is you can still generate 10, 15, 20X returns at any company size at any stage.

The next consideration is thinking about a company, like SpaceX that Rachael mentioned, valued at around $350bn of market cap, where’s the upside here? And I think it’s helpful to remove the upward bound that we place on how large a private company can be. If we look back just 20 years ago, the largest company in the world was GE with a market cap of 340 billion. Today, that largest company is Apple, with a market cap of 3.5 trillion, and there are ten companies that are $1tn or larger.

So I think if you were to make a bet that in the future there are probably more trillion-dollar companies than there are today, and that these private companies, the upper bound could be $1tn, it could be more than $1tn, especially as companies stay private for longer, and as the leading private growth companies stay private.

The last criticism of this space is the IPO market. And I think the way we think about the IPO environment is that it’s all about demand, not so much about supply. So, the IPO demand in any given year is roughly 50 venture-capital-backed tech IPOs. That’s what the markets typically absorb in a given year. There are years where there are more, but those have typically been bubble years, like the dot.com era and the zero interest rate environment.

The problem with the IPO environment today is no about demand, it’s about supply. There’s something like 1,600 unicorns that are looking for public listing. They may never get that. And what you have to look for in a private growth company is you have to look for a large revenue base, you have to be profitable, and you have to be near index inclusion. And there are a large handful of companies that are doing that today.

And one of our holdings is a company, Stripe, which many know, it’s a global payments company. They’re valued at 20 per cent discount to the public market peer, but they’re growing 50 per cent faster. So the thought that if Stripe wanted to go public, which they’ve not said they’re planning on any time soon, but if they did want to go public, there’d be a ton of demand because their named brand already gives them the marketing effort that they need to build a shareholder base, and their discount to Adyen, their faster growth than Adyen, their public [unclear] just makes it that much more desirable.

On the flip side, Stripe could continue to finance themselves in the private markets, through tenders, which they’ve been doing for the past couple of years, and this is another way that we, as shareholders, can get liquidity, if we ever wanted to. 

So I think the IPO environment is something that is often looked at as a problem, but we think that there’s a lot of great companies that can navigate this [unclear] environment. There are other ways that shareholders can get liquidity if they need it.

So in summary, thinking of these common criticisms, non-control is actually a feature, valuations we think are actually very attractive in the private growth space, there’s no size that’s too large for a company to have exponential growth, and the IPO environment is open for companies that are exceptional companies that do want to list.

And a couple more charts here, and then we’ll open up to questions. We thought it’d be helpful to talk about the opportunity, and there’s two ways we’ve thought about it. The first is just thinking about the portfolio opportunity of adding growth to a portfolio that may only have something like buyout today. And what we’ve done to frame this point is we’ve put buyout and growth next to each other, and we’ve looked at how value is created in each asset class.

And we can see in buyout, on the right, is that there’s just a steady contribution of features which give buyout its return. A lot of it’s margin expansion, a lot of it’s financial leverage. A little bit of that is revenue growth. And that all combines to give an attractive return for a buyout owner.

When you look at growth, what we’ve done here is we looked at the average Baillie Gifford holding, and we said let’s say it starts out at 60 per cent growth rate, and that growth rate falls to 30 per cent over the next five to seven years. Let’s say it’s burning a ton of cash. In this model, we’ve said that it’s burning 280 per cent of its revenue, and it’s massively unprofitable. Can that company actually generate an attractive return? And what you can see is that that exponential growth from compounding a 60 per cent revenue growth dominates the model. It gives you a huge base to absorb dilution, multiple compression, and anything else that might impact a total return. And when you put these two side by side, you can see that growth is actually quite complementary to buyout in a portfolio. 

The last chart here is just why we get excited about the private growth opportunity today. And everything we’ve talked about, the asset class features, the ability to add value, the risk and return parameters, there’s actually a point in time today to be owning private companies that we find quite remarkable, and better than many other points in history. So, a lot of this is driven by the zero interest rate environment. If you look over the past ten years, there have been thousands of companies that were built, really, on the back of easy money. That gives us a great hunting ground to invest in attractive opportunities. 

But what happened, as that COVID, zero interest rate bubble burst, is that many of these companies failed, and what you saw is that only the strongest companies survived what was a very turbulent time. And you then had companies that effectively created destruction. Companies were rationalising costs, they were improving their return on equity, they were right-sizing their workforce. And all of this made these companies better companies with better returns on equity.

At the same time, this third chart here shows that valuations have reset over the past five years, and many rounds today are down rounds, and even if it’s a flat round, it’s still a down round as companies grow revenues. So you can now buy a great company today much cheaper than you could buy it three to four years ago.

And then the last thing, this is something that is a little bit more timeless but the tools for success for building a growth company have never been better. It’s so much easier to take a company and scale it today, by adding all the features of third-party software, than it was a decade ago, two decades ago. And this enables companies to be more nimble, leaner, pivot a little quicker, and just have greater success when growing a company.

So in conclusion of this entire presentation, if you walk away and remember anything, it’d remember that private growth is a very new asset class, it’s about 15 years old. The return profile’s comparable to venture, but with less risk. The asset class contains exceptional private companies, and our outlook for the asset class is highly optimistic. And with that, we can now turn it over to questions, so I’ll stop sharing the screen. 

RC: Thanks, Brian. While you’re doing that, I’ll just pull up the Q&A function. If anyone has any questions, please pop them in the Q&A function on Zoom. But we’ve got one here that I’ll just read, and you can answer this one, Brian. So, if I aim for an IRR of over 20 per cent in my alternatives portfolio, which is currently dominated by private debt, leveraged buyouts and private infrastructure, how should I approach growth equity within this context?

BK: That’s a great question. I think if you wanted to generate a 20 per cent IRR owning private debt and infrastructure, even buyout, you have to have private growth in that portfolio to get there. Private credit is only going to get something like a 10 per cent to 12 per cent return. Even if it’s levered, it’s not going to do much more than that, especially after fees. Infrastructure, same deal. Infrastructure IRRs are something high single digits.

And then, if you look at buyout even, the average deal, buyout’s a very competitive process, and multiples haven’t reset around COVID, so you’re now paying peak prices for companies, the cost of financing is quite high, the financial engineering no longer works. It’s going to be really hard for buyout to generate that 20 per cent return as well. In growth, even on this last page, if you have revenue multiples bottoming, because they peaked and then bottomed around COVID, then the growth from here is really driven by revenue growth. And if you have companies growing revenue by 35 per cent year over year, and they’re close to profitability, that’s a really great way to generate a healthy IRR.

RC: Great. And we’ve got one come in here on the risks within growth equity. Are there any that spring to mind for you, Brian?

BK: Yes, I think the biggest risk, candidly, does come back to liquidity. There are a lot of private growth companies, but this risk is in any private asset class. Buyout has the same risk. I think, as we said, there are a lot of ways that we can manage this, and what we’re working on is we’re working on ways to open up our access to secondary markets to dispose, and we’ve been doing that. And there are more options for tenders, and we would expect the IPO environment to open further.

But I think that is one of the risks, that that liquidity window is not obviously open, and so it does take a leap of faith that that will get there. But again, when you come back to an example like Stripe, we have a ton of confidence that Stripe, if they wanted liquidity, could get it tomorrow, an IPO [unclear].

RC: Yes, great. And I promise I didn’t plant this question but we’ve had one question come in saying if private growth is so superior, given its attractive returns and lower level of risk, how come this opportunity hasn’t been explored by more players? And as I say, I didn’t plant that one.

BK: Yes, I really do think it’s just misunderstood. A lot of allocators, and even consultants, have a bucket for buyout and they have a bucket for venture, and private growth kind of takes a piece of one of those buckets. And if it’s living within venture, investors often say I think the asymmetry’s got to be greater because companies are smaller. And if it’s living within buyout, investors often look at this and say I don’t have control, and I really want control in my buyout bucket.

And these buckets mean that, like you said, Rachael, there are these amazing companies that live in the private growth ecosystem but the buckets don’t fail to capture that opportunity, it’s more about how an allocator thinks, and less about the opportunity. So what we’d love to see is a bucket for private growth that sits and is defined on its own, and that we don’t have to push for this non-control and value-add and all these things. The market would just start to understand that these are the features of the asset class.

RC: Great, thanks, Brian. There are no more questions that have come in, so all that’s left to do is to thank everybody for joining us on this morning’s, or this afternoon’s, webinar. And thank you to Brian for your great insights. And if you have any questions, please get in touch with your usual Baillie Gifford contact, and they’d be happy to answer those or get them to us to answer.

BK: Great. Thanks, everybody.

Risk factors

This communication was produced and approved in April 2025 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this communication are for illustrative purposes only.

Financial Intermediaries

This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.