Kim Lew, the CEO of Columbia Investment Management Company, recently participated in a fireside chat and was very bullish on the current private market environment. Her perspective is one we share and many investors have echoed – “The investments made in this moment are likely to be huge successes six years from now… You’re not selling them in the next couple of years. You’re selling them six years from now when the market is bound to be better than it is at the moment.” Investing in private markets is a long-game and thoughtful timing can yield significant results.
But one of the more interesting perspectives was the focus on emerging vs established managers, specifically that established managers “have bad portfolios that they’ve got to manage through. Emerging managers do not.”
The idea is a classic case of the innovator’s dilemma, a concept that describes how established companies can fail when new technologies emerge due to their focus on meeting the needs of their existing customers and business model. This creates the opportunity for new entrants to take market share away from the established players.
Established fund managers already spend a significant amount of time managing the portfolio (board work, recruiting, budgeting and forecasting, etc.), allocating capital to the portfolio in follow-on rounds, and exit planning. All of these efforts are more complex and time consuming in the complicated environment we’re in today, and established managers need to find a balance between preserving their legacy portfolios and finding new investments.
Conversely, emerging managers, unburdened by the complexities of legacy portfolios, possess a distinct advantage in that they can focus simply on what lies ahead.
-Logan Henderson, Founder and CEO
Worth a Read
The Potential of Private Market Investments in Emerging Markets
Accessing the potential of emerging markets through PE investments presents an opportunity for higher returns and diversification. Read more.
Comparing Small-Cap Stocks and Private Equity: Returns and Volatility
While small-cap stocks provide some diversification and return potential compared to large-cap stocks, they pale compared to PE. Read more.
A Final Thought
Venture investors are increasingly interested in defense technology, and recent geopolitical instability has showcased technologies with dual defense and commercial uses.
According to PitchBook’s recently released research piece Vertical Snapshot: Defense Tech, investments in the sector reached $135.3 billion across 4,744 deals from 2016 to 2022, and are expected to surge to $184.7 billion by 2027.
The government’s traditionally lengthy procurement process has made it difficult for startups to sell to the government, but there is growing recognition of the need for streamlining this process, as evidenced by changes to procurement rules embedded in the 2022 National Defense Authorization Act that make it easier for new firms to win government contracts.
Startups that can serve both commercial and government use-cases have grown, evidenced by the rapid success of names like SpaceX, Palantir and Anduril.
Investors understand the importance of developing technology to support national and global prosperity, and we believe it will continue to be a key area of focus moving forward.
Let us know what you think – please don’t hesitate to reach out.
– The Team at Gridline