Fund managers using data to sniff out opportunities, detect landmines

The below is excerpted from Forge’s May Future Private — a webinar series offering perspectives on the private market.

Fund managers see the current market volatility as an opportunity for discerning private market investors.

“And as with all resets, the baby gets thrown out with the bathwater,” said Ziad Makkawi, Founder & CEO of systematic, data driven VC manager EQUIAM. “Good companies get treated the same way as bad companies.”

“Multiples were in the 40s, now, in some cases, they're in the single digits,” he said. “This has come about not like in 2008/2009 where you actually had a major [economic] shock, but because of the fear of what’s going to come.”

“Many companies are still doing well. The ability of fund managers to pick winners and avoid landmines is going to become increasingly important,” said Makkawi. “So, you have to ask [yourself] who has the best landmine detecting technology.”

Makkawi said the visibility provided by Forge Data into private market valuations, as well as other data inputs that feed his proprietary investing model, can help investors make decisions when investing in volatile markets

“Over the past seven years transaction volumes [in private tech market secondaries] have gone up by 200x to $150 billion and the market cap of the [target] universe that we operate in has gone from $400 billion to $4.2 trillion today. Most investors remain unaware of the availability of this data,” he said. “And truth be told, it's not always as easy [or cheap] to find, but it is there. However, data is not enough. You need to transform the data into insights and back test all of that so you can generate buy and sell signals. The compounding of knowledge that a systematic approach provides is really what's valuable.”

Christian Munafo, Portfolio Manager of the Private Shares Fund, said the big questions he’s getting from investors in the Private Shares Fund, focus on private company valuations, the exit environment and whether or not his fund can take advantage of the dislocation in the market right now.

“You’re essentially going to see a bifurcation of higher caliber companies and lower caliber companies,” he said.

He said he anticipates growth might slow but for some of the companies that have experienced skyrocketed growth, a decline to 25 or 50% growth rates is “still pretty good by most traditional standards.”

While there are still private companies pulling in up rounds now, they’re not as likely to happen at the same frequency.

“I think it’s going to take longer for these rounds to get raised,” Munafo said. “There will likely be less over subscription, the multiples will be lower. I think the smartest companies … will avoid pricing altogether,” in favor of round extensions, issuing convertible notes or other alternative capital raising strategies, he said.

Munafo said the weeding out of overvalued companies and fly-by-night investors is healthy for the overall private market ecosystem and spells opportunity for patient investors who can gain access to private market opportunities.

“We had a lot of nontraditional investors vacationing in our markets in recent years, but the vacation is over. The ability to make quick, unrealized returns is over for a lot of these groups. And they drove up a lot of the pricing and now it's coming down,” he said. “But… that also creates a dislocation where sophisticated, more patient buyers… they could really take advantage and secure attractive entry points.”