Private Market Update - December 2023

While public markets appear to be closing out the year in a positive direction, the private market remains more subdued. In November, the SPDR S&P 500 ETF returned 9.13%,¹ while the tech-heavy Invesco QQQ ETF gained 10.82%.² The Forge Private Market Index (“FPMI”), however, was modestly negative for the month, posting a decline of -1.45%.³

Strong public equity market performance in November may have been driven by investor expectations that the Federal Reserve’s restrictive monetary policy period may be coming to an end. Public markets rallied on the belief that the Fed may be able to successfully pull off a so-called “soft landing” — potentially bringing down inflation levels without triggering a recession.⁴

While those same dynamics should also be constructive for the private market, we have not seen broad “risk-on” sentiment for pre-IPO companies. This isn’t terribly surprising, as the private market tends to move more slowly than public equity markets, often lagging on both the upside and downside.

It’s also worth noting that the top private market companies are already showing signs of a potential rebound, as a widening gulf has begun to appear between the best and worst performers. Companies at the top have tended to maintain or even strengthen their valuation positions, while those at the bottom continue to face challenges.⁵ In other words, investors are showing a willingness to pay premiums for top companies, but this rising tide is not lifting all boats.

Data for companies traded on Forge Markets shows this bifurcation in action. For example, the median trade prices compared to the last primary funding rounds for private market companies on Forge Markets showed a -54% discount. But companies at the 90^th percentile bounced back from a down month in October to post a 43% premium in November. That’s significantly higher than those in the 75^th percentile, which traded at a slight discount of -4%. Meanwhile, companies in the 25^th percentile traded at a -66% discount, and those in the 10^th percentile fared even worse at -77%.⁶

The lower valuations of the weakest-performing companies suggest a burgeoning reckoning for some formerly high-flying companies. A recent Bloomberg article citing Forge Markets data highlighted the existence of “dehorned unicorns” — private companies whose valuations have dropped below the $1 billion “unicorn” threshold based on their secondary market trade prices. As many as one third of unicorns minted in 2021 have lost that status, even if their primary fundraising activities haven’t officially brought their valuations below $1 billion, suggesting that many former unicorns are hiding in plain sight.

One encouraging sign for the private market, however, is that while median bid-ask spreads on Forge Markets rose slightly to 15% after falling in October, that level remains right around the monthly average of 14% in the period from January 2020 to November 2023. And it’s a big improvement from the spikes in 2022 and early 2023. Treading closer to this 14% average indicates that private market buyers and sellers are more often finding some common ground, which helps support liquidity.

Part of that trade liquidity might be buoyed by continued signs of private market companies having a path to liquidity through IPOs. While the IPO calendar is still not packed, in November, several smaller yet innovative companies went public, including Richtech Robotics, which provides robotics to the healthcare and hospitality industries, and CARGO Therapeutics, which develops cancer treatments.

Meanwhile, shopping rewards platform Ibotta announced plans in November for an IPO that could value the company above $2 billion, according to Bloomberg.⁷ Biotech company Carmot Therapeutics also filed plans for an IPO in November, but in early December, pharmaceutical company Roche ended up agreeing to buy Carmot in a deal that could ultimately exceed cost $3 billion.⁸

And those deals may not be isolated examples. Bank leaders see far more favorable market conditions ahead, with Bank of America CEO Brian Moynihan predicting that M&A activity will pick up rapidly once interest rates stabilize.⁹ In combination with a nascent thaw of the IPO market, the path to liquidity could be getting a bit easier for private companies.

While significant uncertainty remains, the liquidity picture is arguably brighter as 2023 comes to an end, compared to a year ago. In time, that could trickle down to better performance for a broader set of private market companies if investors feel more confident in growth and liquidity paths. For now, however, the market seems to favor the highest-quality names, though a broader recovery could be in store if the IPO market opens up further and if the dynamics that have boosted public equity markets begin to lead to more support for the private market.

The Forge Private Market Index continues to trail public markets

The FPMI is down -4.1% in the three months ending in November, underperforming most public equity markets. With the recent declines, the FPMI trails public market returns for the YTD period, though strong performance by the “Magnificent 7” stocks (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, and Tesla) — which together constitute 25% of the S&P 500 and more than 50% of the Nasdaq-100 by market weight — has been a primary driver of strong market returns.¹⁰

Companies at the 75^th percentile — a broader sample — were essentially flat, while those at the 25^th and 10^th percentiles continued to trade at steep discounts, though at similar levels to recent months.

After dropping in October, median bid-ask spreads widened slightly to 15% in November to return close to their monthly average of 14% in the period from January 2020 to November 2023. The spread has remained generally range-bound over the past several months after spiking significantly throughout 2022 and the first half of 2023.

Number of companies with sell-side interest on Forge Markets remains high

The number of companies with sell-side interest listed on Forge Markets declined slightly in November after rising in October, though the total has remained resilient for most of 2023.

The number of sellers on Forge Markets continues to outpace the number of buyers, though the ratio of sell-side to buy-side indications of interest (“IOIs”) decreased in November. In a sign that the market may be recovering more broadly, the proportion of buy IOIs hit a recent high in November.