Private Market Update - May 2023

• Forge Private Market Index provides new lens into private market performance
• Select companies trade at a premium for the first time in 2023 while bid/ask spread widens slightly
• Buy/sell ratios remain roughly consistent thus far in 2023

Private market participants continue to navigate one of the most challenging macroeconomic environments of the past decade, with investors in nearly all asset classes adjusting to interest rates that have risen 500 basis points since March 2022.¹ While recent economic indicators continue to present mixed signals, they point to a slight softening of the economy, meaning the Fed may finally be seeing its efforts pay off as it seeks to tamp down inflation without causing a recession.

This month brought positive news, as inflation reports recorded a 4.9% annual increase in May 2023, down considerably from the 9.1% high in June 2022.² But as is typical in today’s climate, there’s a counterweight: U.S. GDP grew 1.1% in Q1 2023, a steep slip from the 2.6% witnessed in the previous quarter.³

On the whole, turbulence in the public equity markets has quieted down, with the CBOE Volatility Index (VIX) dropping, in early May, to its lowest level since November 2021 despite the ongoing regional banking crisis and concerns around commercial real estate. The IPO market is showing its first signs of life, as Internet of Things (“IoT”) integration specialist ARB IOT Group, electric vehicle battery-swapping technology company U Power, and fitness technology company Interactive Strength all made their public debuts in April.

Similarly, private markets continue to find their footing. Certain April signals are flashing positive, like companies in the 90th percentile and above of price premiums trading at a premium instead of a discount for the first time all year. Others indicate more work to be done, such as a slight widening of the bid/ask spread on Forge Markets in April 2023. ⁴

Prominent investors continue to express their long-term growth plans for the private market. A recent BlackRock survey found that 39% of institutional investors see private secondaries as the biggest opportunity in the private market.⁵ A separate study from Goldman Sachs found that 41% of ultra-high-net-worth family offices surveyed plan to increase private equity exposure, and that those “family offices are especially drawn to the private equity secondary market, where institutional investors can buy existing stakes in funds or companies.”⁶

In other words, some of the largest private market participants are forecasting greater involvement in the sector despite The Economist noting that “private markets are notorious for their opacity.”

Forge aims to change that, and bring transparency to the private markets. 

The Forge Private Market Index, launched earlier this month, aims to give investors tools and analytics similar to those available for other, more established asset classes. As the benchmark for actively traded private companies, the Forge Private Market Index reflects the up-to-date performance and pricing activity of venture-backed, late-stage companies that are actively traded in the private market and can be used by investors to measure this asset class and research new investment ideas.

This month’s Private Market Update marks the first time that the index is available for analysis, and Forge looks forward to sharing more data from this new product over time.

Forge Private Market Index shows market down -2% QTD ⁷

Since initiating the Private Market Update in February 2022, Forge has largely represented performance by comparing closed trade prices on Forge Markets to a company’s last primary fundraising round. Primary fundraising valuations are important measurements among the VC-backed tech companies that tend to make up the private market and provide critical insight into private company performance. However, they may bring added latency given their infrequent updates, and Forge sought to provide investors with a way to understand private company performance with more frequent and recent pricing inputs.

The result is the Forge Private Market Index, which aggregates and structures private market trading and pricing data from Forge and other private market platforms and applies a pricing methodology that contextualizes private market transactions into an index model that is recognizable to public market investors who are familiar with indices like the S&P 500. This index aims to standardize the performance reporting of private companies while ensuring that valuations are fresh.

The index consists of four years of index history through different market cycles, with up-to-date performance information on 75 U.S. domiciled, late-stage, venture-backed companies. As noted below, the index shows hypothetical returns exceeding those of several broad public market ETFs, though performance has waned since rates began rising in 2022.

Public market investors know the 11 GICS sectors by heart. But, while the public market has well-established sectors like energy, utilities, and consumer discretionary, the private market is unique and warrants its own sector classification. The Forge Private Market Index is currently comprised of nine distinct sectors and multiple sub-sectors like animal-free protein, payments, and cybersecurity. The Forge Private Market Index goes through a quarterly reconstitution which may shift the number of sectors and subsectors over time – below is the current composition.

Top companies trade at a Premium for first time in 2023

In April, companies in the 90^th percentile and above of price premiums versus last funding rounds saw their stock trade at an 11% premium – the first such example in 2023 of a segment of companies trading above their primary fundraising valuation. ⁸ These outperformers, however, couldn’t raise the median company performance, which fell for a fourth consecutive month.

The median bid-ask spread on new indications of interest (“IOIs”) is at 27% for companies with both buy-side and sell-side interest on Forge Markets, a slight increase from last month. ⁹

64% of the IOIs on Forge Markets came from sellers in March 2023, compared to 36% from buyers – almost exactly in line with last month’s reading.¹⁰ Any future shift to the buy-side may reflect greater investor participation going forward, while a future shift toward sell-side could signal the opposite.

Finally, Forge Markets saw 203 unique issuers with sell-side IOIs in April 2023, up slightly from March.¹¹ This reflects continued supply from sellers looking to liquidate their shares and a potential opportunity for buyers to secure new positions at potentially attractive prices.