Many investors look to invest in innovative companies (the ones developing new technologies, products and business models), as these can often experience the fastest growth and deliver strong returns. However, many innovative companies are not found on public stock exchanges.
Many of the innovative companies found on stock exchanges have already experienced considerable growth by the time their shares are made available to the public.
Let’s explore how private equity can provide you with access to innovative companies in the early days of their growth and what that could mean for your portfolio.
What is private equity?
Private equity investments focus on companies that are privately owned and not listed on stock exchanges. These investments are usually available through specialized funds managed by private equity firms. These funds bring together money from a pool of investors to buy stakes in a selection of private companies.
How private equity works
- Private equity firms discover and invest in lesser known companies that have the potential to grow. They use their expertise to improve those companies’ operations, expand their markets and make them more profitable.
- Private equity investors often cash out their stake by selling the company directly to an interested buyer or to the public through an initial public offering (IPO), whereby shares are offered for sale on the stock market.
Why private equity is linked to innovation
Private equity is becoming an increasingly attractive way to invest in innovative companies, for several reasons.
Firstly, innovative companies are not appearing on public markets as quickly or frequently as they once did.
In the 1990s, companies typically went public after about eight years of operation, and there was an average of 310 companies going public annually.1 Today, the average time before going public has grown to 11.4 years, and only around 112 companies go public each year.
This means that much of a company’s growth and value creation occurs before it’s available on a stock exchange, if the company decides to make itself available to public investors at all.
Private equity investors don’t just invest in innovative companies; they play a major role in helping that innovation thrive. They inject cash into these new companies so they can grow, make new products (or improve them) and enter new markets.
They also participate actively in the management of the companies they invest in, bringing high levels of expertise and experience to the table. They work closely with the leaders of these companies to implement strategic initiatives, improve operational efficiency and drive growth.
Investor advantages of accessing innovation via private equity
There are some key benefits to investing in innovative companies through private equity:
- Early access: investing in companies with huge growth potential, before that growth has happened, can deliver extremely attractive returns.
- Diversification: because they’re not listed on stock exchanges, their performance is less tied to market swings, helping further diversify your portfolio.
- Less volatility: private investments aren’t priced daily on public markets, so their values don’t fluctuate with short-term market movements, offering a steadier long-term experience.
- Professional oversight: private equity managers are experts in choosing the right companies that they can help to optimize their innovations and their value.
Examples of innovative private companies
Here are a few examples of innovative companies that started out as private companies, along with their valuations at the time of their IPOs:
Meta (Facebook): Facebook was launched in 2004 as a new kind of social network. Facebook’s innovations, such as the ability to tag other users’ photos and comment on them, helped it to quickly grow its membership. Other innovations, such as allowing brands to engage directly with a huge number of consumers, helped it to quickly grow its advertising revenue.
Alibaba: this diversified tech company, based in China, has a string of innovative businesses, including an online e-commerce company and video sharing platform. Founded in 1999, the company went public in 2014, raising $21.8 billion (at the time, the largest IPO ever).
Figma: this tech company is highly innovative in the way it allows teams to collaborate with each other in real time, using its web-based interface design tools. While it was founded in 2012, it didn’t launch its product until 2016. It went public in 2025, with an IPO worth just over $1.2 billion. Sequoia Capital was an early investor in Figma while it was still a private company and bought shares at $1.10 each. For the IPO, shares were offered at $33 each.
How you can access innovation through IG and iProfile
You can access private assets at IG through managed products, and stand-alone options through licensed advisors for qualified investors.
If you don’t have an IG Advisor, you can find one here.
Source:
1 Jay R. Ritter: Initial Public Offerings: Median Age of IPOs Through 2024.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
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