Baillie Gifford's Perspective: Why Companies That Stay Private Are Strong
This article explains the investment philosophy of Peter Singlehurst, one of the heads of the private investment department at Baillie Gifford, and the long-term investment methods the firm has cultivated. We will examine, through specific episodes, how he began investing in private companies, the reasons he passed on additional investment in Stripe, the background behind not investing in Coinbase, and what he learned from the significant losses at Northvolt. Furthermore, we will touch upon his stance on AI investment, corporate culture, and relationships with founders, and look at his perspective as a long-term investor and his future outlook.
1. Peter Singlehurst's Investment Philosophy and Baillie Gifford
1-1. The Shift to Private Investment
Peter Singlehurst was originally part of the firm's public market investment team, where he built a track record with a style of holding stocks of rapidly growing companies like Amazon and Tesla for the long term. He ventured into private company investment around 2014, triggered by learning about the existence of companies like Airbnb and Spotify, which were still private at the time but growing significantly.
It was around that time that Singlehurst began to feel that "there is a new trend where companies do not go public until they become large in the private sector." When the question of "who will be in charge of this field" arose, he raised his hand, and dedicated private investment activities began within Baillie Gifford.
1-2. Comparison with Public Market Investment
Baillie Gifford is a long-established investment firm based in Edinburgh with over 100 years of history, and it has traditionally made a name for itself with operations centered on the stock market (public). However, in recent years, they have decided that "as long-term investors, it is a natural flow to also include unlisted growth companies in our scope," and they are actively stepping into private investment.
Singlehurst says that the basic analytical axis for the act of "buying a company" is the same regardless of whether it is listed or unlisted. However, it is also true that it is necessary to deal with elements that are less likely to occur in listed company investment, such as restrictions on information disclosure unique to private companies, governance structures, and the complexity of negotiations surrounding the valuation of the next round.
2. Investment Policy and Examples
2-1. The Case of Wise
The representative success story he cites is the international money transfer platform Wise (formerly TransferWise). At the time of the initial investment, revenue was around $50 million, and it was still operating at a loss. However, the growth rate was high at around 70%, and he felt strong potential in CEO Kristo Käärmann's clear stance of pursuing "low fees and transparency for customers," as well as an "organizational culture that can strategically break through even when regulations are strict."
As a result, Wise expanded significantly not only into CtoC remittance services but also into the corporate sector, and has now grown into a company boasting billions of dollars in revenue. Regarding this, Singlehurst evaluates that "the founder's tenacious customer-centricity and culture drove growth more than differentiation through pure financial engineering."
2-2. Lessons Learned from the Failure with Northvolt
On the other hand, the investment in Northvolt was a painful one. Expectations were high for the company as a key player in battery production in Europe, and the investment was backed by a strong resonance with the themes the company put forward, such as contributing to the environment and establishing an energy self-sufficiency system. However, due to the company's lack of execution, the construction of a mass production system that was stricter than expected, and structural problems in additional rounds, Baillie Gifford passed on additional investment. With the subsequent decline in stock price, they reportedly suffered a significant loss as a result.
According to Singlehurst, it is a "typical example of misjudging the risk when a company struggles to grow," and an investment case where he keenly felt that "it was not just bad luck, but that I had underestimated the risks that should have been seen through essentially."
2-3. Lessons from Passing on Coinbase Investment
Regarding Coinbase, when he first considered the investment, he says he created a "Bitcoin transaction volume estimation model" that was too elaborate and thought based on overly strict prerequisites. As a result, the crypto asset market expanded more than expected and Coinbase grew significantly, but Singlehurst looks back and says, "Passing on it because I couldn't take the risk was a huge opportunity loss in hindsight."
He describes this as a "pitfall of creating too rigorous a model," and says that excessive caution can sometimes be the cause of missing out on high-return opportunities.
2-4. Stance on Large AI Companies
Regarding generative AI, which is currently attracting the most attention, Singlehurst says, "We are passing on investments in OpenAI, Anthropic, or other ChatGPT and LLM (Large Language Model) related companies." This is because it is "not yet possible to conclude" how the difference between technical superiority and sustainable competitive advantage will be determined in the future.
However, they are actively investing in companies like Databricks and Tenstorrent, which support AI infrastructure and software development foundations. He states, "AI as a field is undoubtedly huge, but I want to carefully assess how the core LLMs themselves will be differentiated and generate profits."
3. Long-term Investment and Capital Markets Without End
3-1. The Pros and Cons of Staying Private
In recent years, there has been an increase in the number of companies choosing to remain private for long periods rather than going public. Mr. Singlehurst views the issues of "increased reporting burdens, exposure to pressure for short-term profit seeking, and the ease with which competitors can access information once a company goes public" as problematic, and maintains the stance that "if possible, staying private for a long time allows for greater focus on management."
This is partly because, while large-scale fundraising was once only possible through public markets, in recent years, private secondary markets, large-scale funds, and institutional investors have become able to provide abundant capital to growth companies.
3-2. The Rise of the Secondary Market
Frameworks for "secondary transactions," which allow employees and existing shareholders to secure liquidity without the company going public, are also being established. Examples include the large-scale secondary rounds conducted by Stripe and the repeated capital increases by private companies like Databricks.
Baillie Gifford itself also utilizes a method of recycling capital by selling a portion of its holdings in certain cases to redirect funds toward new investment targets. This makes it possible to achieve significant returns even with private stocks while obtaining a certain level of liquidity when necessary.
3-3. Global Investment Opportunities and Concerns About Deglobalization
The firm has traditionally invested in companies around the world, but Mr. Singlehurst expresses concern about the possibility of increasing decoupling (fragmentation) amid rising geopolitical risks in recent years. While stating that "if countries around the world become mutually closed off, the global expansion of companies will be hindered and growth opportunities will be lost," he also says that ultimately, "it is the role of a long-term investor to carefully examine markets that others avoid." In fact, the stance of reconsidering investments in Chinese companies seems to be driven by the idea that "if everyone avoids them all at once, it might be possible to buy excellent companies at a low price."
4. Future Forecasting and Valuation in Corporate Value Assessment
4-1. The 10 Questions (10Q) Framework
In Baillie Gifford's investment process, a proprietary framework called the "10 Questions (10Q)" is used when evaluating companies. This includes items that emphasize qualitative aspects, such as "What are the growth opportunities 10 years from now?", "Will the competitive advantage continue?", and "Are the culture and business content connected without contradiction?"
4-2. The 5x Return (5x) Model
He takes a unique approach of calculating the "probability of a 5x return over a span of 5 to 10 years" for every investment project. While there is no absolute certainty in probability, the idea is that if you choose companies where you can aim for a 5x return with a rough probability of 30-40%, you can expect good returns as an overall portfolio. He warns against assuming too high a probability, stating that "you shouldn't think there is an 80% chance of a 5x scenario."
4-3. Uncertainty and Risk Tolerance
When deeply involved with a company as a shareholder, the timing of additional funding or partial sales becomes very important. Even when making additional investments, they re-evaluate whether they can "aim for a 5x return again" just as they did with the initial investment, and it is not uncommon for them to pass on the investment if the stock price is significantly overheated at that point.
However, he says that facing risk is always a process of trial and error, noting that there are cases where he regrets his decisions, such as "it might have been a mistake to pass on the additional investment in Stripe."
5. Culture, Management, and Organization
5-1. The Advantage of Founder-Led Companies
Mr. Singlehurst states that "over 90% of our investments are in founder-led companies," and cites as the reason that "founders have vision and obsession, and have a strong ability to root organizational culture." For example, Wise is a good example where the founder continues to serve as CEO and leads the company's growth.
On the other hand, it is not that cases where management other than the founder takes the helm are absolutely bad. For major European flea market app Vinted and others, a substantial "refounding" succeeded under the leadership of a CEO who joined later, and they achieved dramatic growth in performance.
5-2. Consistency Between Culture and Business Model
When evaluating companies, it is also characteristic to place importance not only on the superiority of products and services, but also on whether the organizational culture and business model are consistent. Mr. Singlehurst cites the Milan-based app development company 'Bending Spoons' as a case study, highly praising its absorptive organizational culture.
They acquire existing app businesses that have 'excellent products but weak monetization,' and apply their own data analysis and improvement methods to put them on a growth trajectory—this harmony between a unique business model and a corporate culture that 'persistently continues to improve' is said to generate continuous high returns.
6. The Mindset Required of Investors
6-1. Learning Without Fear of Mistakes
Mr. Singlehurst emphasizes that 'even with investments that ultimately fail, like Northvolt or Inaria, it is important to learn from the decision-making process and oversights at the time.' He says that there are cases where failure is 'simply a risk that materialized' and cases where 'the analysis or judgment itself was wrong,' and that becoming aware of that difference leads to the growth of an investor.
6-2. Responsibility for Corporate 'Ownership' and Adding Value
Mr. Singlehurst himself once thought that 'post-investment value-up support for growth-phase companies does not mean much.' However, in reality, he says that for private companies that are growing, there are many opportunities to provide advice on things like 'selecting independent directors,' 'preparing for an IPO,' 'structuring for additional fundraising,' and 'how to handle large-scale secondaries.'
He notes that 'while it is difficult enough to hold public companies for the long term, private companies have increased information asymmetry and complexity in capital policy, so there are actually areas where investors can provide support,' and it is an interesting change that his firm is deepening its understanding of 'value-up.'
6-3. Identifying Sustainable Competitive Advantage
Mr. Singlehurst says that competitive advantage in the AI era is determined not by a single product itself, but by 'corporate culture, management strategy, and organizational execution.' This is a philosophy that aligns with the firm's experience of investing in Amazon and Tesla for the long term from their early stages.
He also sees that in fields involving hardware or regulatory requirements, there is a complexity that cannot be explained by mere product competition, and that this may be where true differentiation factors are born.
The investment philosophy expressed by Peter Singlehurst is grounded in the 'long-term thinking' that is the DNA of the traditional Baillie Gifford, while also showing signs of having flexibly transformed in line with changes in the fundraising environment for unlisted companies and market structures. His stance of valuing lessons from failed investments while continuing to pursue the path to '5x returns' can be said to be extremely persistent.
What he emphasizes repeatedly are points such as 'the sustainability of a company's culture and vision' and 'how to differentiate through culture and organizational design rather than relying solely on having an excellent product.' Including unfortunate cases like Northvolt, he provides the insight that in order to identify where competitive advantage lies as the macro environment changes rapidly, it is necessary to comprehensively understand not just the product, but also management and corporate culture.
Waves of change, such as the decoupling of the global economy and the AI boom, will likely continue. However, without being swept away by such difficulties or the overheating of booms, finding 'excellent businesses where the vision drawn by management and the organization's execution are in sync'—the investment strategy that Peter Singlehurst and Baillie Gifford will continue to demonstrate will surely continue to provide many insights to both growth companies and investors.
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