20VC The Most Powerful Investor You Might Not Know Why The Distinction Between Public vs Private is BS The Misalignments Between GPs and their LPs Portfolio Construction 101 Diversification, Capital Concentration, Loss Rates with Peter Singlehurst

In a revealing conversation on 20 VC, Harry Stebbings interviews Peter Singlehurst, head of private companies at Baillie Gifford, a firm with £277 billion under management. Singlehurst shares insights on Baillie Gifford's unique partnership structure, its long-term investment philosophy, and the artificial divide between public and private markets. He discusses the firm's approach to investing in high-growth companies, emphasizing the significance of a company's potential to compound over time and the importance of cognitive diversity in their hiring process. Singlehurst also reflects on his career progression, the lessons learned from investment wins and misses, and the importance of aligning with companies' journeys from private to public markets. Throughout the discussion, Singlehurst challenges conventional venture capital structures and emphasizes the value of long-term, fundamental analysis over short-term market fluctuations.

• Bailey Gifford is a prominent investment firm with £277 billion under management as of March 31, 2022.
• The firm is owned and operated by 51 senior executives functioning as a partnership.
• This partnership structure has been in place for over a century.
• Peter Singlehurst is the head of private companies at Bailey Gifford, with 12 years of experience investing in significant firms like Grammarly, Wise, and Zymergen.

"As of the 31 March 2022, funds under Bailey Gifford's management and advice totaled 277,000,000,000 pounds."

The quote emphasizes the scale of Bailey Gifford's operations and the significant amount of funds they manage, highlighting the firm's influence in the investment world.

• Peter Singlehurst joined Bailey Gifford through its graduate training scheme, which is standard for most investors at the firm.
• His academic background is in philosophy, focusing on 20th-century European philosophers.
• Bailey Gifford was primarily a public markets investment firm when Singlehurst joined.
• He worked with the long-term global growth team, which led to the realization that high-growth companies were staying private longer.
• The firm started investing in private companies through the Scottish Mortgage fund, an evergreen fund with a 114-year history.
• The private investment team was established in 2017 and has been growing and deploying more capital into high-growth private companies.

"I applied for the graduate training scheme, which is how pretty much all of our investors at Bailey Gifford start."

The quote explains how Peter Singlehurst began his career at Bailey Gifford, which is typical of the firm's approach to recruiting investors.

• Notion is praised as an all-in-one tool for project management, company information organization, and more.
• It is noted for its ability to replace multiple other tools, potentially saving money for users.
• Notion has a large user base that contributes templates, tutorials, and inspiration.

"More than 70% of companies who start using notion stop using two plus other tools."

This quote highlights the effectiveness of Notion as a comprehensive tool, which can lead to the consolidation of other software, simplifying processes for companies.

• Angellist is commended for its simplicity in managing investment complexities.
• It supports various investment structures, including SPVs, traditional venture funds, and rolling funds.
• Angellist Stack is a new product designed to help founders with company incorporation, banking, cap table management, and fundraising.

"I just love using the angellist platform because it abstracts away all the complexity and operational burden of fund management."

The quote reflects the user-friendly nature of Angellist and its ability to streamline fund management operations for investors.

• Squarespace is an all-in-one platform for creating websites, online stores, and utilizing marketing tools.
• It is recognized for mobile-optimized websites, email campaigns, and SEO tools.
• Squarespace offers a free trial and a discount for new users.

"All websites are optimized for mobile. Content automatically adjusts so it just looks really beautiful on any device."

This quote underscores the benefits of Squarespace in creating responsive and aesthetically pleasing websites for various devices.

• Singlehurst does not consider himself a venture capitalist as he associates VC with very early-stage investing.
• Bailey Gifford focuses on mid and late-stage high-growth private companies.
• The firm engages in fundamental company analysis and is not operationally involved with companies.

"I don't consider myself a venture capitalist."

This quote clarifies Singlehurst's stance on his role and distinguishes it from traditional early-stage venture capital.

• Bailey Gifford hires individuals from various academic backgrounds to promote cognitive diversity.
• The firm believes that essential investing skills can be taught, but cognitive diversity enhances perspective.
• Hiring people with different world views is seen as beneficial rather than focusing solely on those with financial backgrounds.

"The reason we hire from a range of academic backgrounds is because we bring in people with lots of different perspectives on the world."

The quote explains the rationale behind Bailey Gifford's hiring philosophy, emphasizing the value of diverse perspectives in the investment process.

• Bailey Gifford does not strictly segregate investing between public and private markets.
• The transition of a company from private to public is seen as a change in how shares trade, not a fundamental shift in investment strategy.
• The firm focuses on identifying great companies irrespective of their market status.
• Private and public market teams at Bailey Gifford work collaboratively, sharing insights and sourcing advantages.

"I really think that the public-private divide is an artifact of the financial universe rather than anything that you would come up with if you were thinking about investment or company formation from first principles."

The quote challenges the conventional separation of public and private markets in investing, suggesting that the distinction is more financial than foundational.

• Singlehurst expresses concern over potential misalignments of interest in the later stages of a traditional venture fund's life.
• The incentive structures in traditional funds, such as carried interest, may encourage distributions and fundraising cycles that are not always aligned with long-term ownership.

"I think that when you get into the tail years of limited life funds, I worry that you start to get misalignments of interest."

This quote highlights Singlehurst's concerns about the alignment between venture funds and their limited partners, especially as funds mature.## Investment Logic and Returns

• Investment decisions should be based on finding great businesses and owning them for a long time.
• It's important to consider the logic of investment returns, which is not always aligned with short-term market trends.

"ch doesn't necessarily align with the sort of logic of investment returns, of finding great businesses and owning them for a really long time."

This quote emphasizes the importance of focusing on long-term investment in quality businesses rather than short-term market movements.

• Scenario planning should be done within the context of probabilities.
• It's important to think about the factors that could lead to a company becoming a high-return investment.
• Factors include market size, financial characteristics, competitive advantage, capital requirements, and return on equity.

"We create scenarios in which we are deliberately contrived, where a company can be a very high returning business and a high returning investment for our clients."

This quote discusses the deliberate creation of scenarios to evaluate the potential of a company to provide high returns.

• Competitive advantage is difficult to predict and defensibility is often built over time.
• The analysis of competitive advantage should be dynamic and consider how it may evolve as the company grows.

"We are not trying to accurately nail down what a company's competitive advantage is or will be."

This quote acknowledges the challenge in precisely defining a company's future competitive advantage.

• Long-term investment is conditional on performance and execution.
• Decisions to continue investing are straightforward when faith is lost but difficult when the cause of underperformance is unclear.

"That sort of long term hold is not unconditional. It's conditional upon execution, performance, and the delivery of returns for our clients."

This quote clarifies that long-term investment is contingent on the company's ongoing success and delivery of returns.

• Bailey Gifford starts with standard position sizes and intends to build on those as conviction deepens.
• Understanding a business is best achieved through shareholder experience.
• Portfolio construction involves concentrating capital in companies where conviction is growing.

"We size positions with the intention and desire to continue to build on those as conviction builds and deepens."

This quote explains the approach to portfolio construction, emphasizing the growth of investment as conviction in a company strengthens.

• The probability-adjusted upside of a company can grow as it becomes larger and executes successfully.
• The concept of a company never being cheaper than it is today is challenged by the potential for increased probability of outsized returns as the company grows.

"The probability adjusted upside of companies can often grow as they become larger."

This quote suggests that the potential for returns can increase as a company grows and becomes less risky.

• Diversification is aimed at maximizing the probability of capturing outliers, not just mitigating downside risk.
• Bailey Gifford does not diversify based on traditional sectors but on underlying commonalities between businesses.

"We would think about it much more in terms of diversifying to maximize the probability of capturing outliers."

This quote indicates that diversification strategy is focused on the potential to capture exceptional investment opportunities.

• Bailey Gifford's portfolios typically have 40-45 companies with concentration in the top ten holdings.
• Capital concentration is not unconditional and is based on the deepening conviction in those companies.

"But you'll often see quite a lot of concentration within the top ten holdings as we, as putting it, sort of concentrate capital in those companies where conviction is building."

This quote discusses the approach to capital concentration, which is based on the level of conviction in the top-performing companies.

• Bailey Gifford has experienced a lower loss ratio than expected, with only one bankruptcy in ten years.
• The low loss ratio is attributed to investing in revenue-generating businesses rather than super early-stage companies.

"We've deployed something like $10 billion into about 100 private companies. We've had one bankruptcy of a company, which is nothing to be proud of, for sure."

This quote provides insight into the company's investment history and its unexpectedly low loss ratio.

• The low loss ratio prompts internal questioning about whether enough risk is being taken to pursue alpha.
• Growth and performance of the portfolio are used as indicators of appropriate risk-taking.

"I think that if we had a sort of stagnant portfolio of companies that were chugging away at 10% year over year, then we would be really worried."

This quote reveals the concern for ensuring the portfolio is taking sufficient risk to achieve significant growth.

• Bailey Gifford avoids investing in companies that are likely to be acquired in the short term.
• The focus is on companies that have the potential and ambition to grow independently over the long term.

"We're trying to find companies that over 510 15 year view can go on to become 510 20 times their current size."

This quote highlights the long-term growth ambition that guides investment decisions, favoring companies with the potential to significantly increase in size.

• The rapid pace of capital movement in the last year has affected due diligence processes.
• Bailey Gifford walked away from investments where due diligence could not be adequately performed.

"So we were seeing rounds happening last year at speeds that certainly wouldn't have enabled us to do our necessarily diligence."

This quote describes the challenges faced with the increased speed of investment rounds and the impact on due diligence practices.## Crossover Funds' Response to Market Volatility

• Crossover funds are facing challenges with the volatility in public markets.
• Their response to these challenges may be influenced by their clients, the limited partners.
• The ability to raise successive funds will likely determine their future market behavior.

I think it's a really interesting question and I think in many ways the people that will decide the answer to that will be their clients, their limited partners. It'll be whether or not they can go on to raise successive funds that will determine how they conduct themselves in this market going forward.

This quote emphasizes that the future actions of crossover funds in response to market volatility will largely depend on the confidence and decisions of their limited partners, as it directly affects their capacity to raise new funds.

• Some venture capital (VC) firms provide extensive services and use fees to pay for operational costs.
• Not all VCs add operational value; some may use it to justify high fees.
• Genuine value addition by VCs exists, but it is important for firms to be clear about their strengths and limitations.
• Bailey Gifford focuses on helping companies transition into public markets rather than early-stage operational advice.

I think there are definitely some VCs that add an incredible amount of value. I would also say though that there's a sort of industry of using that as air cover to carry out quite a lot of window dressing around so-called value creation in order to justify very high fees.

Peter Singlehurst points out that while some VCs truly add value, others may exaggerate their value-add services to justify charging high fees.

• Founders often mistakenly try to appeal to all investors when going public.
• A successful IPO involves finding aligned shareholders, which can be a competitive advantage.
• Amazon's ownership by long-term investors has allowed it to invest and grow with focus.

I think it's that they view the process of going public as trying to appeal to everybody. They want to sort of convince every investor they meet that they're a great company and that they should invest in them.

Peter Singlehurst highlights a common misconception among founders that appealing to all investors is necessary for a successful IPO, whereas the goal should be to attract a small, aligned investor base.

• Going public can offer employee liquidity, which is a commendable reason.
• Other reasons, like early investors seeking to exit and collect carried interest, may not be as favorable.
• Some companies, like Epic Games, may remain private for extended periods without a need to go public.

I think a good and honorable reason is to give employees liquidity. [...] I think a really bad reason for going public is you've got early stage investors who have funds coming to the end of their life, and they want to distribute capital to their limited partners and collect carried interest and all of that whole circus.

Peter Singlehurst distinguishes between noble reasons for going public, such as providing employee liquidity, and less commendable ones, like early investors wanting to exit for financial gain.

• Bailey Gifford engages in secondary transactions to provide liquidity for employees and early investors.
• They avoid the brokered market for private companies, which can be opaque and unreliable.
• Secondaries are done in conjunction with the company and usually with firms where they have already invested primary capital.

No, we wouldn't ever do sort of secondaries within funds I mean, we will do secondary transactions within our portfolio companies, so we'll help provide a bit of liquidity for employees and in some cases early stage investors.

Peter Singlehurst clarifies that Bailey Gifford does not engage in secondary transactions within funds, but they do provide liquidity for employees and early investors of their portfolio companies in a controlled manner.

• Peter Singlehurst's investment style evolved from public to private companies, focusing on growth businesses.
• Building a team of investors and developing new skills has been a significant change.
• It is essential to create a safe environment for the team to learn, develop, and make mistakes.

I suppose that there's quite a narrow way to look at it, which is I started off my career looking at public companies and then I started looking at private companies. But fundamentally, I think what I've always been doing is looking at great growth businesses.

This quote reflects on Peter Singlehurst's career progression and his consistent focus on identifying high-growth businesses, regardless of whether they are public or private.

• Creating a culture that allows freedom and interest-driven research is crucial.
• Building team resilience and maintaining good communication are essential, especially during difficult times.
• Longevity and trust within an organization contribute to a strong team dynamic.

I think that point around sort of giving people oxygen is a really important one. [...] The question of, I think, sort of how you can facilitate and kind of build, I suppose in a way, it's about sort of building resilience within a team.

Peter Singlehurst discusses the importance of allowing team members to explore their interests and the value of resilience and trust within a team, especially in challenging times.

• Young investors should focus on investment philosophy and process rather than uncontrollable outcomes like share prices.
• Bailey Gifford avoids short-term distractions by not focusing on share prices but on the fundamentals of companies.
• Long-term development of companies is the primary focus, rather than daily share price fluctuations.

I think in times like this it's really important to focus on the inputs. [...] Because share prices are outputs, particularly in the public markets, they are pretty uncontrollable.

Peter Singlehurst advises young investors to concentrate on their investment approach and not be swayed by the volatility of share prices, emphasizing a long-term perspective.

• Even with thorough analysis, investments can fail, such as Intasia's unsuccessful regulatory approval for a diabetes therapy.
• Failed investments provide learning opportunities and can lead to better future decision-making.

So that company that I mentioned, the one that went bankrupt, was a business called Intasia.

Peter Singlehurst shares an example of a failed investment, Intasia, which serves as a learning experience and underscores the inherent risks in investing.## Dealing with Probabilities

• The speaker learned to be cautious of high probability events as they might not be as likely as they seem.
• There is a behavioral bias to underestimate the likelihood of events perceived as low probability.
• It is important to reassess probabilities that appear at either end of the spectrum.

"What I learned was that I should be very wary of anything that I believe to be high probability."

This quote highlights the lesson of skepticism towards one's own certainty in high probability events, suggesting that what seems certain may not always be so.

"The things which appear to be low probability actually often have a much higher probability than you might think."

This quote suggests that events often dismissed as unlikely may, in fact, have a greater chance of occurring than initially assessed.

• There are no facts about the future; historical events only play out once.
• Decision-making processes are kept lean, with open, high-trust conversations among decision-makers.
• The team avoids large investment committees and instead focuses on small, nimble discussions.

"There aren't any facts about the future, and all of these, history only plays itself out once."

This quote emphasizes the uncertainty inherent in predicting the future and the uniqueness of historical events, which cannot be replicated to test probabilities.

"We keep it pretty lean... We really try to sort of keep it quite small and nimble."

This quote describes the speaker's approach to decision-making, which favors a streamlined and flexible process over a more bureaucratic one.

• The speaker's experience with Tesla taught them about the behavioral and intellectual aspects of investment asymmetry.
• There are times when even successful investments can make an organization look foolish.
• Long-term investment perspectives are crucial, and feeling 'stupid' at times is part of the process.

"I think what I really learned there was not just intellectually, but behaviorally, what asymmetry really looks like."

This quote reflects on the speaker's understanding gained from investing in Tesla, particularly regarding the disproportionate potential of certain investments.

"Even in your most successful investments, there will always be a time where you look and feel really stupid."

The speaker acknowledges that successful long-term investments can go through periods of doubt and criticism.

• Having the freedom to sell in public markets can be challenging for investors committed to a long-term strategy.
• The firm thinks of public holdings as nearly as illiquid as private investments due to their long-term view.
• Being geographically removed from financial hubs helps maintain focus and independence from peer influence.

"If we're investing in a company with a ten year view, probably shouldn't be doing anything two or three years into that investment journey."

This quote underscores the firm's long-term investment philosophy, which treats public investments with the patience typically reserved for private holdings.

"Being based outside of a lot of financial ecosystems really helps us."

The speaker values the firm's physical distance from financial centers, which contributes to a more independent and focused investment approach.

• Missing the opportunity to invest in DoorDash was a learning experience about the importance of founder commitment.
• The speaker realized they had placed too much emphasis on competitive advantage rather than the founder's zeal and mission.

"I should have placed much greater weight on was the founder of DoorDash and why he'd started the business."

This quote reflects on the missed investment in DoorDash, highlighting the importance of the founder's vision and dedication over other factors.

• "The Myth of Sisyphus" by Albert Camus influenced the speaker's perspective on creating personal meaning in life.

"Life is fundamentally absurd, but that you can create your own meaning in life."

The speaker resonates with Camus' philosophy that one can find motivation and purpose through self-created meaning despite life's inherent absurdity.

• The speaker's opinion on the gaming industry evolved from seeing it as hit-driven to recognizing the impact of digital distribution and in-game purchases.

"As I came to really understand the ways in which digital distribution and in game purchases in video games completely changed the set of incentives for game developers and players."

This quote explains the speaker's change in perspective on the gaming industry, acknowledging the transformative effects of modern monetization and distribution methods.

• Becoming a father increased the speaker's empathy, potentially improving their relationships with colleagues.

"I think that becoming a father makes you more empathetic."

The speaker suggests that the experience of parenthood has enhanced their ability to relate to others empathetically, which could influence their professional interactions.

• The speaker believes the distinction between private and public company investing is arbitrary and unhelpful.

"Dividing the world between private and public company investing is just meaningless."

This quote expresses the speaker's view that the investment industry should not differentiate so starkly between private and public markets.

• Being outsiders in the industry, both geographically and philosophically, can lead to strengths and insecurities.

"Being outsiders within the industry that we operate in every day."

The speaker acknowledges the firm's position as outsiders, suggesting that it can be a source of both strength and insecurity in the investment landscape.

• Meetings with founders like Tim Sweeney of Epic Games and Garab and Sean from Solugen were transformative, changing the speaker's perception of what was possible.

"Your view of what is possible for this business or your view of the world is changing."

This quote captures the impact of meeting visionary founders who can significantly alter an investor's outlook on a business's potential.

• The speaker's firm led an investment round in Grammarly, attracted by its low-profile company with a high-profile product and a thoughtful leadership team committed to culture.

"It's a business that's known for being a spell checking tool really. But actually what they're doing is helping people communicate more effectively."

The quote explains the firm's investment rationale for Grammarly, emphasizing the product's broader mission beyond its initial use case.