At Baillie Gifford, we seek to be engaged, long-term owners of businesses. Our average holding period is over seven years and our preferred holding period is eternity. Focusing on the ‘hold’ rather than on how to buy or sell businesses is how we have created value for clients over time.
Our portfolio companies choose to work with us because we are focused on their long-term outcomes. In private markets in particular, the business owners we work with are at a point in their lifecycle where a stable partner is critical to executing on long-term objectives. When we can fit long-term capital to the long-term objectives of business owners there is a natural alignment.
In private markets that alignment does not yet exist as it should. Historical investor holding periods of three to four years, driven by antiquated vehicle structures, has created a transactional mindset. These structures do not meet the needs of business owners, nor do they maximize return potential for asset owners. In 2021 we set out to establish a private equity vehicle that would re-establish alignment between business owners, asset owners and ourselves.
Offering a permanent capital mindset through a 15-year vehicle
Our goal was to bring a permanent capital mindset to a limited-life vehicle. On behalf of our clients, we want to be able to own businesses for as long as the investment thesis holds and the upside potential remains intact. We have always been able to execute on our philosophy by operating within permanent capital structures, but not everyone can invest in these vehicles.
There are two issues with the private market vehicle structure we were looking to solve:
- The 10-year fund is not a long-term vehicle. If the limited life vehicle is going to remain relevant, there needs to be an acknowledgement that longer-term commitments are necessary. Ours is a 15-year fund. Incidentally, many clients have remarked that their 10-year funds end up as 15-year funds anyway due to extensions.
- The IPO is an artificial divide between private and public markets. The IPO is a corporate finance decision that is virtually unrelated to the investment case behind owning a business. That it has become a liquidity event within private equity fund structures is destructive to wealth creation. We will own a company for as long as our investment case remains intact, regardless of how that company chooses to capitalize itself.
The case for adapting fund structures of private market participants
Over the past year our clients have offered a near universal appreciation of the need to adapt fund structures around the changing needs of private market participants. We have seen a groundswell of support around the principle of better alignment and the need for continuity of ownership. Some clients have discussed the need to change the way they consider employee compensation to remove any misaligned incentives. Others are questioning the need for narrowly defined buckets within their asset allocation which may be creating unnecessary transaction costs, opportunity costs and reinvestment risks. Regardless of whether our clients make these changes now or in a decade’s time, it is rewarding to know this dialogue is underway and that there is consensus on how to better align our industry over time.
Being long term in private markets allows us to solve this dislocation between management teams and investors. Being long term allows us to provide well-aligned capital with a focus on the future, not the exit. Being long term allows us to provide continuity of capital to these businesses and, crucially, continuity of ownership for our clients.