The Covid19 pandemic has certainly helped records tumble in many ways, but one that I took note of last week was that on 2/2/22 the world passed 1,000 unicorns (companies that are worth $1billion or more) – 100 more than in July 2021. What a milestone! A Crunchbase search shows that the total value of these companies is now $4 trillion (in July 2021 – $3 trillion) – the effective market capitalisation of the “unlisted large company” universe.

Comparing this number to the total market value of all listed companies on the London bourse according to Statista: “As of January 2022, the total market value of all companies trading on the London Stock Exchange stood at approximately 3.91 trillion British pounds.” That translates to $5.3 trillion value for 1,300 companies. It is true that unicorns are only valued each capital round whereas listed markets move daily, but the trend is clear, in my view.

Can one take anything from this view of value and specifically growth rates? The first time that Crunchbase noted more than 100 unicorns was in 2015, in that year the total market capitalisation of companies listed on the LSE was around the $5 trillion mark (familiar number, now). One can certainly conclude from these statistics that privately funded companies have outperformed listed equities, or at least those in London, which performed more poorly than some peers, but is not materially different from other bourses.

What elements drive the value of unicorns as opposed to large listed companies? This is what my mind pondered over the weekend. There are factors such as cheap debt, cyclicality and liquidity premium which does impact to some degree.

For now, I would like to concentrate on the leadership question – but why would listed company leaders be weaker than those driven by private capital (including Family offices)? That does not make sense – there have been as many visionaries heading public companies as private.

I spent the weekend at a birthday party to celebrate a friend turning 50 and with it the incredible opportunity to ask a number of corporate leaders their opinion on this thinking. My thesis was that the difference lies primarily in the intentionality of the board. And I believe that many that I spoke to supported this view. A typical board is made up of executives and non-executives (NED) in both cases (public and private companies); helped along by the 1990’s Cadbury thinking on corporate governance. One friend who is a head hunter observed further differences between South Africa, the UK and the USA – the way in which non-executives can and do influence decision making in any company.

I thought further then on the influence of non-executives and again my head-hunter friend pointed out to me that the appointment of public company NED is often driven by the board themselves (even the CEO) and not shareholders (given that there are many shareholders in a public company it is difficult to build the influence). The “old boys club” is still fine and well and although NEDs are expected to challenge the executives, such challenge is often not welcome and even possibly career limiting.

Private companies (including family businesses) tend to be more intentional about hiring NEDs that will bring value by thinking through the strategy and challenging it – indeed often such people are experts in certain fields, not only audit or remuneration (the “check list”). So, could it be that NEDs are a critical part of unicorn growth?

I believe so, and came to the conclusion that bringing fresh blood into Stock Exchange listed companies is essential for the survival of the public equity market. I recall a few years back learning that certain profiles (names) on the board were an essential part of listing – individuals with deep experience on listed company boards and by definition have and do serve on many boards. I recall that Cadbury mentions a maximum of three non-executive roles for an individual – a nice living, but not exactly helpful in introducing new blood. The other contentious argument is NED remuneration linked (or not) to company performance. I would be interested to know whether in unicorns there is more in the way of remuneration linked to company performance (Cadbury was not a great supporter of this).

A final thought is that unicorns are built intentionally. Why do I say that when I’m sure that every public company CEO also has intentions? Company shareholders who back a specific and well thought through strategy and put in place the leadership that helps this happen tend to be large (in percentage terms) shareholders and again, by definition, public companies seldom have very concentrated shareholding.

Private equity funds and family offices differ in one regard, though; the PE funds usually have timelines after which they need to sell out of the business whereas family offices often stay in for generations. But I believe the professional managers of these (family) offices often behave with specific outcomes in mind in terms of growth, not necessarily an exit. But they have to be able to offer value to management in the form of an exit or partial exit to enable the managers to participate in the value creation.

Of course there are always exceptions, but I do believe that Private Equity has proven over the past two or three decades that proper, focused execution of a plan results in wealth creation. And I am convinced that suitably qualified and appointed NEDs are an important part of it. NEDs who are selected to fill the table but not to challenge and add value are a problem that has existed since the concept of boards began, but I strongly believe that their roles in public companies need to change. One of my helpful reviewers asked how this should happen and I believe that there is a role here for the Institute of Directors (IoD), which exists in a number of countries – I am a member of the South African chapter.

A nice extract from the editorial ITWeb, a South African business magazine summarises this point nicely: “ … recent research by the IoD SA indicates that the level of technology expertise on the board, enabling them to challenge the exco’s assumptions, is lacking.” – and that is only one aspect that NEDs should be equipped to challenge.