With the help of historical documents, provided by the archives of T. Rowe Price, this exclusive series for finews.com readers summarizes some of the most important events within the asset management industry. Now, the focus is on the future of the industry.
A little while back, readers of finews.com embarked on a journey through time, focusing on the topic of asset management. The series covered the industry’s development, beginning at the world economic crisis of 1929 to today's situation.
Now, the focus is on the future of the industry, which is very much based on continuity and the long term. But that requires setting the course early on to meet future challenges. finews.com took the opportunity to talk to T. Rowe Price experts about a market that is increasingly coming into the investor spotlight.
Many factors have contributed to the rapidly growing private investment market over the past decade. The abundance of capital in the global financial system played an important role as low-interest rates drew investors away from fixed-income markets and into risk assets, including private equity and venture capital. In addition, the pandemic accelerated risk-taking by pushing real yields further into negative territory.
Filled with Money
The aggressive change of course by central banks this year, towards tightening monetary policy has increased risk aversion and led to a significant correction in both public and private markets. However, it is unlikely that the private market will abandon its growing role in the financial system in the face of volatility. On the contrary, many companies will probably choose to postpone their IPOs as long as the valuations of public companies remain well below recent levels.
«With coffers filled, traditional private equity investors, such as hedge and venture capital funds, will aggressively approach private companies to invest capital,» David DiPietro, head of private equity at T. Rowe Price, points out. According to financial data firm Prequin, venture capital firms had about $400 billion in cash reserves at the end of 2021 and growth-oriented private equity funds had another $310 billion.
Because of these factors, private markets also play an increasingly important role for asset managers. Thus, private investments can be described as the next step in the evolution of asset management.
Steady Decline
(Image: Ewan Buck, Unsplash)
Many innovative growth companies want to stay private for a longer time. Several factors have also played a decisive role here: among them the extensive and costly regulatory burden on a public company as well as the abundance of available capital in the private markets. This is one reason why the number of publicly traded companies in the US, for example, has steadily declined since 1997, from more than 7,000 to fewer than 4,500 by the end of 2019.
Given the ample supply of financing in the private market, company founders have been able to realize personal liquidity through private financing rounds. Businesses that do not require large capital investments, such as software companies, are more likely to remain private for longer. So do companies that can forgo going public.
«The result is a virtuous cycle in which the growing number of private companies – and the shrinking number of public companies – attracts more capital to the private markets,» Eric Veiel, Head of Global Equities and CIO at T. Rowe Price, adds.
What Makes Investors Attractive?
Building deep trust is an important part of the process of working in partnership with private companies. This also includes improving the understanding of a company and its competitive environment decisively. This in turn can be achieved through extensive industry knowledge, strategic potential and a focused team. Only in this way, are asset managers able to be accepted as investors by private companies.
To do so, they must be able to draw on many years of expertise. «To date, our private investments are largely the result of our relationships with the management of companies or venture capitalists,» Veiel says. These initial contacts began with us almost two decades ago when portfolio manager Jack Laporte managed small-cap growth portfolios for T. Rowe Price.
«Moreover, executives in growing companies understand that investment can provide more than just the capital needed to expand. A private investment from a top investor signals to other investors that this is a responsibly managed company on its way to becoming a successful public company,» says DiPietro.
Early Potential for EV 2.0 Recognized
(Image: Ralph Hutter, Unsplash)
But what does that mean when it comes to specific investments? Early on, T. Rowe Price recognized how much potential there was in the production of electric vehicles. So, they invested in Rivian Automotive, a pioneer in the field of e-mobility. «Our largest private investment in recent years has been Rivian, which manufactures electric vehicles in the sport utility and light truck markets. The company is a good example of how we follow promising companies and co-invest with them as they grow. «We believe Rivian is positioned to take the next steps, which we call EV 2.0,» Di Pietro says.
Instead of developing a new approach, Rivian hires industry veterans and selectively uses the efficient production methods that automakers have refined over decades. The company also has top technology executives on board. The result shows that Rivian successfully combines the automotive and technology worlds. Rivian delivered its first vehicles in August 2021 and went public just three months later. Rivian's growth prospects are viewed positively: they are first to market in electric vehicles, which together account for about three quarters of the demand for cars.
Research is Critical
Valuations of private companies remain high compared to the public markets. It can often take several quarters for private valuations to adjust to the lower levels of the public market. As capital floods into the market, selectivity and research are critical. Successful rounds of financing by one company in an industry have encouraged others to follow – sometimes without a solid plan to put the capital to work.
On the other hand, more great companies are being formed than ever before. The disruption caused by the internet and the broader digitalization of the economy has been taking place across industries and has made room for innovative upstarts. The caliber of these companies is impressive and there are many well-run companies with promising products.
Independent Analysis
There needs to be a stringent process in valuing private companies based on the guiding principles of fairness and independence, says Christopher Casserly, a member of the Valuation Committee: «We want to be fair to both the buyers and sellers of our products. That means being fair through independent analysis that takes into account both the information currently available and the long-term potential of these investments.»
T. Rowe Price's growing role in the private markets is just another step in the company's evolution during the decades since its founding in 1937 when founder Thomas Rowe Price, Jr. (pictured above, Image: TRP) began offering what today would be called «segregated accounts» for individuals. As markets evolve, the company will continue to find ways to offer clients access to some of the most promising investments.
