Big technology names are staying private, what does that mean for retail investors?

In past generations of game-changing technology, the initial public offering (IPO) was a key benchmark. Companies like Facebook (now Meta), Amazon, and Google (now Alphabet) all used their IPOs to raise much-needed capital, sparking an era of growth for the companies and for tech investors. Today, however, some of the biggest names in technological advancement have elected to stay private. OpenAI and SpaceX are likely the two most notable examples, but a wide range of companies on the cutting edge of tech are choosing to delay their IPOs, or to stay private entirely.

Elliot Johnson, Chief Investment Officer at Evolve ETFs, explained why some of these companies have elected to stay private. He outlined what that means for those companies as well as for the overall investment landscape. He highlighted some of the routes retail investors have taken to gain access to these companies, whether through private shares, proxy companies, or tokenization, and what these dynamics mean for a sector like technology that has driven so much market growth.

“It used to be that companies went public specifically to access capital that was in excess of what they could raise in private markets,” Johnson says. “What's happened is there has been a maturity in private markets as well as kind of a grey market in secondaries that is sufficiently liquid and robust that companies can stay private for longer and continue to raise capital.”

Johnson notes, as well, that a public offering comes with a far more rigorous set of transparency and reporting requirements that might not suit the requirements of a company aimed at pushing the boundaries of a particular technology. If SpaceX was public, for example, their share price might fluctuate wildly on the success or failure of each successive rocket launch. The more infrequent pricing of privately held companies as well as the different expectations of a management team can act as powerful incentives for companies to stay privately held.

It is only the public companies with massive and diversified scale that can offer some quarterly positivity while pushing for long-term R&D projects. Johnson cites the example of Apple, which can report its enormous sales volume each quarter while investing billions in an eventually unsuccessful car project. Pure-play R&D names, however, are more subject to the vicissitudes of the quarterly report, which incentivizes remaining private.

There may be some change to that incentive structure coming, should President Trump’s proposal to scrap quarterly earnings reports be made policy. In the meantime, however, these companies appear to remain private leaving investors to seek other means of accessing them.

One of the most clear and obvious routes to that access is via proxy companies. Microsoft, Johnson notes, owns a significant share of OpenAI and positive news about OpenAI has been a tailwind for the company’s stock. Johnson sees it as a smart strategy for investors who see positive news about a private company to look for any publicly listed investors in that company. Given the scale of some of the biggest technology names, he notes that many now hold shares in several key private names, further consolidating the investment appeal of big tech.

Johnson also sees a new means of investor access emerging in the form of tokenization. In recent months US discount brokerage Robinhood has explored putting private shares and secondaries onto a blockchain, effectively turning those assets into a tradeable token for public investors. Stakes in those private companies can be put onto a crypto rail to give investors access.

There are still risks to accessing these private names via either crypto or proxy companies. Johnson notes that liquidity can often be an issue with private shares. He says that advisors and investors are often best served by using a managed fund to access these private assets, which can often help control for liquidity issues.

For tech investors who had previously relied on IPOs to inject new blood and new technologies into public markets, Johnson notes that the trend of retaining private ownership should continue to drive appreciation in the big tech names, for their stakes in these private companies and their role as the end buyers of startup companies. He thinks that advisors talking to clients the different means of accessing these names should begin with a macro snapshot of the sector.

“Ignore the divide between private and public and ask where the growth is happening,” Johnson says. “Tech continues to be a growth engine. There's a lot of growth happening in private markets where either we have access, because we've got some approved managers we can get into who have some of that in their funds, or we don't have access. In that case we need to make sure that we probably are overweight large tech versus the index, because you want to make up for the loss that you're not getting in the private market by making sure you're like extra allocated through the public vehicles that you can have access to.”