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Investors have a series of complex choices to make when presented with different options. They can prioritize stability or they can prioritize profitability, but very rarely do investment options provide an opportunity that is both low risk and high yield.
Large-cap private companies are one of those rare opportunities.
“By focusing on these private companies, investors can benefit from the stability and growth potential of established businesses while mitigating some of the risks associated with earlier-stage investments,” reports Robert Hodgins, Fund Manager at Sand Hill Road Technologies Fund. “This strategy aligns well with the goal of achieving substantial returns with a balanced risk profile.”
Hodgins is a veteran manager who excels at identifying and nurturing high-growth potential within the technology sector and leverages an extensive network of private equity investors to support the growth of portfolio companies. Sand Hill Road Technologies Fund connects accredited investors to cutting-edge technology companies poised for global success, empowering them to increase their earning potential by investing in the largest private equity companies before they go public.
The following are some of the key factors that make late-stage private companies stand out in the investment world.
Reduced risk
Early-stage private companies attract investors because of the potential they have for explosive growth. They also offer investors a type of first-mover advantage, allowing them to secure an investment before the company’s potential can attract widespread attention.
However, investing in early-stage companies also comes with higher risks. Failure rates are high among early-stage companies — 90 percent of startups eventually fail, with 10 percent failing during their first year of operations — which means investors have a higher-than-average chance of losing their entire investment.
As companies mature from early-stage into more established organizations, many of the factors that lead to instability are addressed. With late-stage companies, investors can assess financial histories and management performance to better understand the company’s potential.
“Private companies are typically more established in the marketplace,” Hodgins shares. “They have proven business models and revenue streams, which helps to reduce their risk compared to early-stage startups.”
Secure access to capital
Working capital is an organization’s lifeblood. While it provides the fuel it needs for daily operations and enables growth, early-stage companies often struggle to access it.
“Large-cap private companies usually have access to substantial capital, which can be used for expansion and scaling operations,” Hodgins says. “This makes them more resilient and capable of navigating market challenges.”
Help from strategic partnerships
Venture capitalists (VCs) often invest in private companies to help them mature into more established businesses. VCs provide more than working capital. VCs that invest in early-stage companies offer expert guidance and network access, providing a strategic partnership as well as financial support. For other investors, VC involvement in late-stage companies is often seen as a benefit.
“Investing in late-stage private companies often involves partnering with leading venture capitalists and other strategic investors,” Hodgins points out. “The additional support and resources for growth those entities provide bring key advantages to companies.”
Higher liquidity
Illiquidity is one of the key downsides to investing in early-stage private companies, as investments can remain locked in for years while the company pursues an acquisition or IPO. Essentially, investments in early-stage companies need to be embraced as a long-term commitment.
Conversely, late-stage companies are much closer to the milestones that can lead to a payoff for investors, meaning the timeframe for accessing a return is much shorter. Late-stage companies also tend to offer more opportunities for accessing liquidity via sales on secondary markets.
Targeting late-stage private companies allows investors to avoid the compromise they typically must make when seeking high-yield opportunities. Rather than assuming the risk that comes with the potential for a high return, investors can leverage late-stage companies to add stable and profitable components to their portfolios.
Disclaimer
The information contained above is provided for information purposes only. The contents of this article are not intended to amount to advice and you should not rely on any of the contents of this article. Professional advice should be obtained before taking or refraining from taking any action as a result of the contents of this article. Sandra Hinshelwood disclaims all liability and responsibility arising from any reliance placed on any of the contents of this article.
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