As IPOs retreat, private company shareholders are selling — and prices are falling
While current owners may not be so happy, investors who failed to own a stake in some of the most famous private companies are getting a second chance.
This is because the investment universe in the private market has never been so vast and so cheap. According to PitchBook, the number of private companies valued at over $1 billion reached 340 in 2021, more than the past five years combined. And they are now trading at a 20% discount from the last quarter of 2021, according to the latest monthly report from Forge Global, a private market trading platform.
“If you are looking to invest in private companies as an asset class, there has never been a more appropriate time in the last ten years. [to do it]said Andrea Lamari Walne, general partner of Manhattan Venture Partners, a venture capital fund focused on the late-stage secondary market. She added that discounts were rare in 2020 and 2021 but now look “crazy”.
Private company stocks are subject to a more complicated price discovery process than public stocks. Instead of being traded on exchanges, they change hands on third-party trading platforms such as Forge Global, Carta, and Nasdaq Private Market. The rise of these secondary platforms has allowed investors to assess private companies in a way that goes beyond simply tracking venture capital investment rounds or takeover deals.
One of the main reasons for the sharp decline in private company prices is the slowdown in IPOs. Due to public market uncertainties spurred by persistent inflation, rate hikes and geopolitical strife, the number of public listings fell to 28 in the first quarter of 2022, a “significant decline” from the same period of previous years, according to PitchBook.
“We have a completely closed IPO window right now,” said Greg Martin, managing director of Rainmaker Securities, an investment bank specializing in late-stage private securities trading. The company has been told by Goldman Sachs that it could take until the fourth quarter before the IPO window opens again, according to Martin.
The lackluster IPO market has also created an appetite for liquidity among private company shareholders, according to Glen Anderson, co-founder and chairman of Rainmaker. “The longer the IPO market remains sluggish, the more sellers we see coming to us looking for a sale,” he said. II. “[For] For example, over the past four months, we have seen our sell-side order book double in size.
The growing interest from sellers has also been spotted by Forge Global. In January and February, sellers of more than 160 private companies had shares for sale on the platform, the highest number since March 2019. Their willingness to list shares at a discount increased,” the Forge report said.
In addition to employees, cross-funds investing in both public and private markets also sold shares of private companies. According to Walne, many such funds have suffered losses on their public investments since the start of 2022 and had to sell some of their private positions. “They need [cash] to cover margin calls and other things on public strategies,” she said. II.
Anderson said institutional investors could seize the opportunity to “bargain hunt” their investments in private companies. “The main driver of price action in private markets is price action in public markets and the IPO market,” he said. Given that public markets have seen a sell-off since the start of 2022, private markets will likely follow and offer investors cheap admission to pre-IPO companies.