The potential impact that AI will have on our lives is being compared to the Industrial Revolution of the 1700s… welcome to what is known as the “Intelligence Transformation”.
The AI industry is growing rapidly, and the markets for AI services and their related components are expanding. Very few AI related companies are public (on the stock market), as many are privately owned. With the AI industry in its infancy, many are left wondering how to gain investment exposure to popular AI service companies like ChatGPT.
When industries are new, it is common for startup companies to begin privately. Many start as a single owner/CEO, or a collection of owners (private investors), who start the company and oversee its growth. Stock market investors may never have the opportunity to own shares of these great private companies because well… they’re private, and that means they are not available on the stock market.
ChatGPT is a great example of a well-known, private company, owned by its parent company, OpenAI. With its growing popularity, many want to be a part of its growth story. Here are two ways investors can “buy” a piece of ChatGPT…
Option 1 (Public Equity) – Investing in public companies, who have invested directly in OpenAI. Microsoft Corporation (Symbol MSFT) has an investment in OpenAI valued near $147 billion US – close to 3.9% of Microsoft’s $3.74 trillion US dollar market cap.
Option 2 (Private Equity) - Investing in select Private Equity funds, who have invested directly into OpenAI (among other private companies). Hamilton Lane’s Global Private Assets Fund is a private equity alternative investment that owns a diversified portfolio of private companies, including OpenAI. OpenAI is now a 0.4% weighting of Hamilton Lane’s Global Private Assets Fund.
What is Private Equity? When a local company grows to a massive valuation, it can be challenging for the owner/owners to sell shares of their business. Few individuals have access to enough funds to buy a piece of a company that large. In these circumstances, large private equity firms, who pool investment dollars from smaller individual investors, can raise enough capital to invest in such a company. In some circumstances, these private equity firms will purchase a majority share and take over the private company. This allows them to control the board of directors and provides the company with access to the resources and expertise of the entrepreneurs employed by the private equity company – think Dragon’s Den or Shark Tank.
By the time a private company is listed directly on the stock market, some exponential growth may have already taken place. Stock market valuations such as the price to earnings ratio (P/E), are also traditionally higher than the valuations that private companies sell for. This is a potential benefit of private equity, as an asset class, as the stock market hits record highs and stock market valuations are stretched.
Traditional investment classes, such as public equities (stock market) and fixed-income (bond market) have a far reach when gaining exposure to different sectors and industries… but for these tougher to reach industries… our team leaves no stone unturned in our search for market opportunities. Alternative investments, like private equity, are less correlated to traditional asset classes, and are proving to be another way to get some exposure to the ever-growing world of artificial intelligence.
- Nathan Dyck
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that any action is taken based upon the latest available information. The strategies and advice in this blog are provided for general guidance. Interest rates, market conditions, special offers, tax rulings, and other investment factors are subject to change.
