How to invest in groundbreaking innovation

The stock market may host some of the world’s most successful companies, but some of the greatest breakthroughs in recent history have been made by startups and small private firms that weren’t yet public. Over time, while investments in these startups have significant risks, a select group of those early-stage companies—such as Tesla and Alibaba—grew to become global leaders in their respective industries.

Approximately 10% of investable companies are traded on public markets.¹ Investors who are not exploring private markets may not be making themselves available to the full range of investable opportunities, some of which may include the future leaders of innovation.

Private markets are growing in size and importance as well. There has been a surge in business creation in the U.S. since the pandemic, with more than 1 million applications for new business formation in each of the last 14 quarters.²

We believe that by accessing private companies, investors could benefit from their potential to deliver greater growth than public market businesses at lower starting prices

Today, we see four areas where investors can access innovation through alternatives: artificial intelligence (AI), healthcare, cybersecurity and climate investing.

Artificial intelligence

Since the launch of ChatGPT in November 2022, artificial intelligence has fascinated investors and the public. Megacap tech and other early “AIleaders” are still posting outsize financial gains today. It might seem strange to think about the next generation of the technology so soon, but another wave of AI is beginning. Newer companies are already building on the first breakthroughs of generative AI and finding ways to apply it across the broader economy.

U.S. companies collectively invested $67.2 billion in AI in 2023, up 22% from the year before. Still, adoption of AI is in its early stages. As of November 2023, just 3.9% of companies in the United States were using the technology.³

This means that, for all the attention focused on AI to this point, its full potential may not yet be tapped. The stock prices of semiconductor makers and hyperscalers—or hardware and cloud computing leaders—are starting to reflect the value, but that’s not true elsewhere. We think opportunities are expanding and expect more winners to emerge. Investing across public and private markets can help investors capture complementary opportunity sets.

We look to private markets to identify companies that are building new foundation models for generative AI, as OpenAI and Anthropic have, as well as for less capital-intensive applications that will help people and companies use AI in new ways.

Meanwhile, in public markets, we see opportunities to invest in companies with significant capital and resources that are driving advances in hardware and cloud storage. We also see opportunities in non-sectors such as healthcare and consumer services that may benefit from AI by using it to grow revenues or cut costs.

The fundamental point is that we are only starting to see the benefits of AI, and what it can do for companies’ bottom lines.

Healthcare

Innovation is a constant in healthcare, and private markets can offer an increasingly important way to invest in it. Over time, drugmakers have shifted their emphasis from internal research and development to outsourcing innovation,⁴ which often means buying potential drugs through mergers and acquisitions. This trend is especially prevalent in biopharma, which is a key source of innovative new drugs for the broader pharmaceutical industry.

Before the end of the decade, patents for more than 190 drugs will expire, and drugmakers will try to replace as much as $236 billion in sales.⁵ Advancements in their own drugs will cover part of that gap, but drug companies will also lean heavily on acquisitions of other companies’ products and technologies to fuel future growth.⁶

Given the costs and complexity of the healthcare system, we think companies that are able to improve efficiency by using AI can prosper. To that end, private market investors such as growth equity and venture capital firms are backing technologies that use AI to cut costs, speed up diagnosis, drug development and treatment, and support business operations.⁷ Over the last five years, venture capital firms have backed more than 1,000 healthcare companies per year,⁸ with greater resources going to companies that are using AI in drug development.

Cybersecurity

Cybersecurity is critical for businesses today, as they must secure data and information against constantly evolving threats. Businesses and governments have been spending ever-larger sums on data security, and we expect that trend to continue as opportunities for data breaches proliferate with the adoption of new technologies, including AI.

Cybersecurity breaches are becoming more common and more costly. In 2023, the monetary damage caused by cybercrime reported to the U.S. Internet Crime Complaint Center grew 21% to $12.5 billion.⁹ The average cost of an individual breach rose to a record $4.45 million. Reflecting the growing importance of this issue, President Joe Biden’s proposed 2024 budget proposes dedicating $74 billion to IT modernization, including cybersecurity initiatives.¹⁰

Not surprisingly, there has been tremendous growth in providers focused on cybersecurity. Private businesses are fueling innovation in this area. Often, they are subsequently acquired by large public technology and cybersecurity players in a pattern similar to the one seen in the healthcare industry.

Strategic buyers in cybersecurity innovate by acquiring private companies to build out their capabilities and create new platforms for customers. Over the last five years, the mix of capital invested by these firms has clearly shifted to earlier stage companies.

We think these signs of strong and growing demand could boost cybersecurity-related spending for years to come. As in healthcare and AI, we believe alternatives are an important way to access this innovation and potential growth.

Climate investing

The energy transition has emerged as a megatrend over the last decade as renewable and sustainable energy technologies gain widespread use and “green” solutions become more pressing. While electrification and molecule advancement are underway, a new focus on decarbonization is emerging.

In 2023, global investment in the energy transition—the switch from reliance on fossil fuels to renewable and lower-emission technologies—reached $1.8 trillion. That represented a dramatic 17% increase from the year prior. The U.S. renewables market grew 60% from 2022, driven by government stimulus including the Inflation Reduction Act of 2022, consumer demand, and easing constraints on the supply chain.

In our view, public markets today don’t reflect the full range of opportunities to invest in the climate transition. These include clean power generation, electric car companies, and software companies that connect renewable energy providers with consumers. As governments and businesses look to accelerate their transitions to “net zero,” more opportunities will likely emerge.

We’re focused on themes including decarbonization solutions, the energy transition, electric transportation, and the development of “clean” molecules and materials that can be used in lower-carbon or even carbon-negative applications. Again, AI may play a role, as we expect it to drive further growth in climate initiatives across key value chain areas, including supply chain optimization, maintenance and manufacturing.¹¹

Putting it all together

We believe that investors should still aim to achieve their core equity exposure through public markets. However, we think there will be opportunities to invest in innovation in private markets. We recommend a balanced approach.

Beyond their innovative qualities, alternatives can provide an important source of diversification. Their low correlation to the stock market can help during periods of short-term volatility, and they hold the potential to deliver more significant long-term growth.

We can help

To gain access, we partner with skilled managers across the alternatives universe who seek to identify and invest in future disruptors: private market companies with the capacity to produce significant growth.

Many investors choose to partner with us because of our rigorous scrutiny of managers. Our in-house team conducts on-site visits, examining the structure, operations, incentives and individuals on a manager’s team. We set out to deliver a carefully curated set of high-conviction opportunities to help you realize your goals. 

If you’re interested in learning more about our alternatives platform and how private investments may fit in your financial plan, speak with your J.P. Morgan team.

¹Capital IQ, February 2023

²U.S. Department of Labor, Bureau of Labor Statistics. Data as of Q4 2023

³U.S. Census Bureau. 

⁴https://www.syneoshealth.com/insights-hub/internal-rd-versus-externalization-which-pharma-strategy-yields-greater-success

⁵“Big pharma’s patent cliff is fast approaching,” The Economist, April 23, 2023.

⁶Ibid.

⁷ https://www.bain.com/insights/generative-ai-global-healthcare-private-equity-report-2024/

⁸Pitchbook, February 2024.

⁹Statistica, April 2024

¹⁰https://www.whitehouse.gov/wp-content/uploads/2023/03/ap_14_it_fy2024.pdf

¹¹https://www.bain.com/insights/reality-check-energy-and-natural-resources-executive-pulse-2024/