Private Market Update - April 2023

• Discounts nearly level at –51%; bid-ask spread narrows slightly
• Companies exercising right of first refusal more often thus far in 2023
• Private market lags public market, seen in quarter-over-quarter returns

Despite concerns over possible ripple effects from the Silicon Valley Bank collapse, as well as ongoing interest rate challenges and recessionary fears, both public and private markets closed the first quarter showing signs of resilience.

For example, new data from Forge shows that both buy-side and sell-side discounts on new indications of interest (“IOIs”) remained relatively stable in March despite SVB collapsing in the first half of the month. While IOIs are still coming in at steep discounts to a company’s last primary fundraising round, not much has changed compared to the start of the year.¹

The banking troubles also didn’t seem to spur more shareholders to rush for the exits. On Forge Markets, the number of unique issuers with sell IOIs has essentially remained flat over the past two months.² Meanwhile, public markets also held up on a broad basis. The Nasdaq 100, Nasdaq Composite, and S&P 500 indexes all rose in March.³

However, as Forge has noted since we started publishing the Private Market Update, private markets generally lag public markets. For the first quarter of 2023, major stock indexes like the aforementioned ones had positive returns, while the price of companies that traded on Forge Markets in both Q4 2022 and Q1 2023 dropped -15.8%.⁴

While it’s tough to say if/when private markets will catch up, investors might consider keeping an eye on data points such as: the discount to a company’s primary fundraising valuation, the bid/ask spread for shares on the secondary market, and the rate at which companies are exercising their right of first refusal ("ROFR”) to buy back shares.

Meanwhile, IPO and M&A activity might be showing the first signs of emerging from a long hibernation. According to the Wall Street Journal, marketing software company Klaviyo has hired bankers in preparation for a possible 2023 IPO. “That could set the stage for some of the dozens of companies waiting in the wings to list shares, including grocery-delivery company Instacart Inc. and British chip designer Arm Ltd.,” the WSJ article notes.⁵

To be fair, the article adds, the IPO market has had false starts before. And one company does not make a trend. So, while these plans from Klaviyo are encouraging, it doesn’t necessarily mean things are back to normal.

But another positive sign can be seen in the M&A market. A Bloomberg News survey shows that despite a relatively weak quarter in terms of transaction volume, activity didn’t crater either. The article notes that “most were encouraged by a flurry of private equity deals announced in the first quarter while markets were still gripped by volatility, rising interest rates and banking-sector chaos.”⁶

While it’s unclear exactly what will happen from here, the underlying theme seems to be that some of the worst-case scenarios have been avoided so far. Investors need to be ready for what comes next and can prepare by closely monitoring actionable private market data and insights in conjunction with the often leading trends gleaned from the public market. Especially if IPO and M&A activity pick back up, it’s possible that private markets could follow suit.

Prices show slowing rate of decline

In Q1 2023, the median trade price of all companies traded on Forge Markets showed a -51% discount to a company’s last fundraising round. That’s nearly the same as Q4 (-50.5%), suggesting the rate of decline has slowed considerably.⁷

It’s still far too early to declare that prices have stopped falling or that they may increase any time soon, but this encouraging development may at least indicate some sort of price stability among companies that have been hit relentlessly hard over the past year.

Looking at a smaller group, prices on average fell -15.8% when comparing companies that traded on Forge Markets in both Q4 2022 and Q1 2023. In contrast, many large public market tech-focused indices returned close to 20% in Q1.⁸ This exemplifies the lag that private markets tend to experience versus public markets.

Companies are also exercising their right of first refusal more frequently in 2023 compared to last year. There are several reasons why a company might exercise its ROFR, and input from Forge Markets participants suggests a belief that their shares are trading at attractive prices and that existing investors seek to add to their cap table positions. This may indicate an improving market, and is a data point that Forge will continue sharing as the year unfolds.

Bid-ask spreads narrow slightly to 21% for issuers with buy and sell interest

The median bid-ask spread on new IOIs is at 21% for companies with both buy-side and sell-side interest on Forge Markets. This remains elevated from the median spread of 13% but down from the all-time high of 28% in August.⁹ As with discounts, it’s too early to call this a trend but nevertheless an encouraging sign for potential market improvements.

The lack of immediate impact from SVB’s collapse is more evident when looking at IOIs in all companies on Forge Markets – not just those issuers with both buy and sell interest.

When looking at new IOIs, buyers sought discounts of 51% to a company’s last primary fundraising round, while sellers were willing to sell at 37% discounts.¹⁰ Considering that the broader banking crisis occurred throughout March, we may have expected a sharper drop in March – so it’s encouraging to see relative stability in this reading.

Larger companies trying to avoid down rounds as mutual funds continue marking down shares

In Q1 2023, companies valued > $2 billion raised money at an average 4% valuation increase from their last primary fundraising round. Companies valued from $1-2 billion raised money at an average 7% valuation increase, and smaller companies valued $500m – 1 billion raised money at an average 2% valuation decrease.¹¹ It’s important to note that this analysis and chart only focuses on companies covered by Forge Data, and not the entire universe of private companies, and the primary round valuation picture resembles secondary market discounts – a steep drop throughout 2022 and potential signs of leveling out in 2023. 

Some companies are opting to raise financing via convertible debt, which allows them to defer the valuation until a subsequent equity financing event – which may be one reason why we are not seeing more down rounds. And there’s still the matter of “dirty term sheets” — deals with investor preferences that have all of the characteristics of a down round, but don’t show up in the valuation.

Mutual fund marks have a one-quarter lag, so we’re just now able to look at the totality of 2022 marks from some of the biggest investors in the space. By the end of the year, mutual funds were marking 72% of their investments at a discount to the company’s last fundraising round – and only 10% at a premium.¹²

Five consecutive quarters of growth for $10+ billion companies

In Q1 2022, 17.9% of Forge Markets volume flowed to companies valued over $10 billion. One year later, that number is 57.5%.¹³ Larger companies may have more attractive economics, stronger business models, and closer proximity to an exit than smaller companies – and thus may have benefited from a risk-off sentiment. If these flows start to shift toward smaller companies, it may be a sign that investors are increasing their risk appetite.

Sell-side interest remains elevated

There were 189 unique issuers with sell-side IOIs on Forge Markets in March 2023, even from February levels.¹⁴

64% of the IOIs on Forge Markets came from sellers in March 2023, compared to 36% from buyers.¹⁵ This remains roughly consistent with previous months. Given that this reflects the ratio of sellers to buyers, this will be another reading to watch in coming months to see whether trends show signs of change.