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Today, an increasing number of companies are favouring private markets to raise capital rather than pursuing an early public listing as this provides founders with greater flexibility and control. By the time they do head for an IPO, a large proportion of their value has already been created and none more so than the much-anticipated public debut of Elon Musk’s SpaceX which is targeting a value of $2tn. If it goes ahead, it will shatter the record of oil giant Saudi Aramco which raised $25.6 bn in 2019.

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OpenAI and Anthropic are also looking to list this summer at valuations of $850bn and $800bn respectively. At this point it’s worth taking a moment to realise that if they do, the 10 largest companies in the S&P 500 index will account for around 50% of its market capitalisation. That is some concentration risk – the bigger a company becomes, the larger its weighting will be in the index and more money will automatically flow into it. Passive investors buy according to a company’s market size and index weighting, rather than purely on fundamentals and valuation.

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This can be both good and bad for the active manager. On the plus side it leaves good stock pickers plenty of opportunity to buy companies at better values, as well as the obvious advantages of creating diversification for clients and managing risk. But being underweight the top ten is a risk if momentum drives the index ever higher. FOMO will undoubtedly feature as investors pile in, but we all know where this can end and we have yet to see if the return on capital is justified by the huge capital expenditure.

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As it happens, our investors have been able to access SpaceX via the Scottish Mortgage Investment Trust, managed by Tom Slater who has sensibly estimated a lower value than others at $1.25tn which should bode well if the debut disappoints. Tom has invested £151 million into the company since 2018 and the fair value of this stake is c£2.98 bn, an increase of 19.7x.

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But it’s worth remembering that when it comes to concentration risk, we’ve been here before. Back in the 60s/70s investors piled into the Nifty Fifty’s, a small group of 'must have' growth companies that accounted for 45% of the S&P 500.  At its peak Polaroid Corp. dominated the instant camera market and traded at a p/e of over 90x. But rising inflation and interest rates burst the bubble bringing markets down with them.

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Future returns still depend on the price you pay today and valuations by any measure are rich. Running with the crowd is great whilst it lasts. As ever, the advice is to spread the risk.

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Comments from James Scott-Hopkins, Founder of EXE Capital Management.

The views are those of the author only.

The above does not constitute a recommendation to buy specific funds or assets and advice should be sought from your financial advisor as to the appropriateness of this in your portfolio. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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