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Private Market Update - June 2024

Investors flock to AI companies as “the Great Reset” unfolds

Key Takeaways

  • Private companies traded at a median -31% discount in May, the highest number in 2 years.

  • Global venture funding was up in May, bolstered by AI companies.1

  • The Forge Private Market Index was relatively flat in May but remains in positive territory year-to-date.2

Overview

There’s a rhythm to the technology industry and the private companies that underpin it that has seemingly played out since the turn of the century.

New technologies appear on the horizon as private companies pursue innovation. After a gestational period in the startup garage, they bloom and begin maturing in the mainstream. While some fail spectacularly, the cream of the crop succeed beyond their wildest expectations and introduce new innovations to supplant the incumbents in the market.

One year ago, Forge’s data showed that the private market was undergoing “The Great Reset” as investors began shifting their sentiment away from the COVID-era companies that propelled the private market from 2020-2022 and began focusing on a new crop of artificial intelligence (AI) companies that had the potential to drive a resurgence in the market.

Fast forward one year – AI is seemingly everywhere, and it appears to be driving significant investor interest in the private market. Investor sentiment is shifting, and it’s showing in Forge’s private market data.

Outside of Forge, venture capital is showing signs of life and the environment for fundraising and exits seems to be improving. Global venture funding hit its year-to-date high in May, with $31 billion deployed during the month, a 40% gain from April, according to Crunchbase.3 While the topline number looks encouraging, it’s worth noting that over one-third of that funding went to just six AI companies. And while the amount invested in AI companies is up, the number of primary market rounds with AI companies is down, potentially creating an opportunity in secondary markets.

May was also relatively slow for IPOs compared to April, but 2024 is still outpacing 2023.4 Looking ahead, IPO pipeline seems relatively strong, with names like Cerebras, Chime, and StubHub possibly going public this year. While the number of companies looking to go public is “building and solid,” according to Citi, its fate may have ties to the timing and number of interest rate cuts.5

The Details

In May, there was a notable shift in the distribution of premiums/discounts for companies trading on the secondary market to their last primary funding round. For the month, private companies on Forge Markets traded at a median discount of -31%, which represents the smallest discount in two years. The top 10% of companies traded at a 47% premium and the top 25% of companies traded flat to their primary valuations.

This upward shift is driven heavily by a change in the mix of private companies trading on Forge Global. There’s no major shift in the premiums/discounts of long-standing names that have been trading for many years. Instead, investors are pursuing a new crop of companies, many with an AI focus. These newer issuers are more likely to trade at smaller discounts, or even premiums to their primary valuation which is more likely to be recently set.

Meanwhile, this broad market activity seems to be driving the Forge Private Market Index, which is up 1% thus far in Q2, slightly trailing the Nasdaq 100 (QQQ) but outpacing the Russell 2000 (IWM) and Renaissance IPO Index (IPO). The Forge Private Market Index is up 5.2% year-to-date, trailing only the S&P 500 – which is also being heavily driven by AI names like NVIDIA. 6 7

Digging deeper, the top performing private companies in May showed some diversity, led by construction firm EquipmentShare, and closely followed by AI chip leader Cerebras. HR SaaS firm Rippling rose 14.9% this month. Bottom performers include aerospace company LeoLabs, logistics company Flexport, and SaaS firm Asapp.

The bid-ask spread has remained relatively consistent over recent months, ending May at 9.1% and below the average median of 11.4% -- again, suggesting that buyers and sellers are relatively close on price.

In May, there were 232 unique companies with sell-side indications of interest (IOIs) on Forge – an all-time high that suggests new supply of private companies coming to market for investors to consider.

Meanwhile, the distribution of buy and sell IOIs on Forge shifted slightly. After three months of being tilted toward the buy-side, Forge saw more sell-side demand in May and the market sits potentially closer to equilibrium.

1 Crunchbase, 06/05/2024

2 Forge Data, as of 06/05/2024

3 Crunchbase, 06/05/2024

4 Stock Analysis, as of 05/31/2024

5 Bloomberg 5/15/2024

6 Forge Private Market Index as of 6/5/2/24

7 S&P Dow Jones Indices as of 6/11/2024

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