- The Forge Private Market Index eked out a 0.01% gain over the last three months ending 7/31
- Bid/ask spread on Forge Markets declined to 15% in July – lowest level in 18 months
- Ratio of buyers to sellers inches closer to 50/50
After soaring in 2021, private markets and the overall economy walked a tightrope of corrections in 2022 to avoid falling into the inflation abyss.
Rate hikes, valuation cuts, layoffs – it seemed like everyone threw the kitchen sink at the problem, and it may have worked. While the path ahead may still be rocky, there are signs we might be approaching the other side of this challenging period.
For starters, the Federal Reserve is no longer forecasting a U.S. recession, as Chair Jerome Powell said in his July press conference.1 To be fair, the Fed still foresees a slowdown in growth, but a soft landing now seems more like a reality than a pipe dream.
This brighter outlook coincides with an improving inflation picture. The latest data shows a 3.2% year-over-year rise overall and a 0.2% monthly increase in inflation,2 giving hope that the Fed is nearing the end of its interest rate tightening cycle. And it’s not just the economists reporting improvements – consumers also anticipate price inflation to cool going forward, an important sign for the health of the economy. 3
If inflation truly eases and interest rates remain paused or reduced, both public and private markets may see an increase in demand in their spaces.
Public indices such as the S&P 500 and the Nasdaq Composite have had double-digit year-to-date gains, which could continue if investors have more incentive to look for returns from equities amidst lower yields on cash.
If risk-on sentiment grows, private markets could also see a boost as investors search for yield, sectors like artificial intelligence keep growing, and VC funding improves. In a sign of potential stabilization, the Forge Private Market Index is up 0.01% over the rolling three month period ending July 31st – the first such instance of positive price movement since late 2021. 4
Investors seem to be keying into these shifts. Over the past few months, the percentage of buy-side indications of interest (IOIs) on Forge Markets has trended up, with July inching closer to equilibrium between buyers and sellers. The bid-ask spread also declined, indicating that liquidity may be improving. 5
Strong names in particular are rising above the headwinds. Despite the median discount to primary round deepening slightly overall last month, top-quartile companies saw an improvement in their trade prices relative to last primary fundraising rounds.6 And in the first week of August alone, there were five VC deals worth at least $100 million. 7
The largest of these deals was a $175 million Series C for Nile, an enterprise networking software company, which more than doubled its overall funding. 8 The next largest round, $125 million, went to Newlight Technologies, a company that converts greenhouse gases in the air into a usable material. 9
As these examples show, AI companies aren’t the only ones attracting investor interest right now. The IPO market is showing positive signs too. The Wall Street Journal recently reported on the New York Stock Exchange and Nasdaq competing for listings “in sign of IPO awakening.” 10 Although the pace of public listings is always subject to change, the article notes that Klaviyo “could debut as early as September” on the New York Stock Exchange and Instacart is expected to list on the NASDAQ by the end of the year.
So, if the overall economy continues to show positive signs, conditions may turn more favorable for private companies as well as buyers and sellers.
Forge Private Market Index shows signs of stabilization
Over the rolling three month period ending July 31st, the Forge Private Market Index gained 0.01%. 11 While comparable public market indices were up double digits in that time frame, we believe this increase is notable because the last 18 months have been characterized almost entirely by steep declines.
The Forge Private Market Index also recently underwent its standard quarterly rebalance, with six new private companies entering the index, including Intercom, Cohesity, and Front, and a 1.4% increase in its sector allocation to enterprise software.
Non-Forge Private Market Index data from Quandl and Sharadar.
Disclaimer: The performance of the Forge Private Market Index does not represent the performance of any actual investment, as you cannot invest in the index, but rather reflects the hypothetical growth of a $10,000 investment in a basket of securities based on the Index.
Bid/ask spread at lowest level in 18 months while median discount increases slightly
Data from Forge Markets also brought some positive signs in July, along with a reminder that progress is unlikely to be linear.
The bid/ask spread on Forge Markets has been sliced in half over the last three months. Buyers and sellers were 30% apart on their prices in April as the regional banking crisis took hold, and that median spread declined to 15% in July – the lowest reading in 18 months.12 A continued steady decline in this metric may suggest buyers and sellers getting even closer to common ground on their trade prices, potentially leading to more activity in the private market.
Meanwhile, the median company on Forge Markets traded at a -58% discount to its last primary fundraising round in July, a slightly deeper discount from June. However, it’s notable that companies in the top 25% improved to an -18% discount in July (up from –42% in June) and the top 10% of companies traded at a 16% premium (up from –5% in June). 13
The Great Reset in private markets can be most clearly seen through these valuation metrics. As noted in the Forge Investment Outlook, as of Q2 2023, companies were waiting an average of 20 months between fundraising rounds – and that length of time has been increasing for nearly two years. In addition, 101 mid and late stage companies covered by Forge Data raised money in Q2 2023 – down from 318 at the peak in Q2 2021. 14 So, companies are waiting longer to raise money, and fewer companies are raising money – which means valuations risk being stale.
As more companies re-enter the primary fundraising arena and right-size their valuations, it’s possible that these discounts will revert to the median once new data enters the market.
Buy interest increases for fourth consecutive month, highest since August 2022
In October 2022, buy-side IOIs on Forge Markets sat at 26.4% – essentially meaning that for every three offers to sell private company stock, there was one buyer. As of the end of July, that number has climbed to 43.6%, meaning that the market is nearing a point where there’s an equal proportion of buy and sell interest for private companies. 15
Notably, the number of companies with sell-side interest has remained relatively stable during this entire period. There were 194 unique companies with sell-side interest in July, which is slightly down from the peak of 217 in January 2023 but still well within the 180-200 range that Forge has seen since March 2022. 16
Previously, when the buy-side outpaces the sell-side, it has come with a smaller number of companies available to purchase. For example, there was more buy interest than sell interest during ten of the months in 2021 – but only 80-120 companies available for purchase.
So far, the market is yet to show that kind of trade-off. If buyers return to the market but sellers remain committed to the idea of trimming equity positions while companies remain private, it could create a new dynamic during this period.