Private Market Update

Private market investors navigate volatility as institutions sharpen focus

Key Takeaways
  • According to Forge Data, quarter-over-quarter data shows reduction in private market trade prices
  • Private companies continue to trade at valuation premium to last primary financing round
  • Sell-side inventory on Forge platform at record high, but sectors showing reasonable balance between bids and asks

We often write about how the line is blurring between public and private markets. Both markets are feeling the effects of inflation, rising interest rates, and geopolitical events, as investors chart a new course forward in a rapidly changing economic environment.

While publicly company technology stocks have been among the hardest hit in the recent market drawdown, new data from Forge shows that private company technology stocks have done a slightly better job of retaining their value over the last two quarters.

Investors are searching every corner of the market to find ways to deploy capital to seek growth. Increasingly, the private market offers some key advantages over public markets that have more investors sitting up and taking notice.

Early Access to Value Creation: As companies stay private longer, it’s increasingly possible that a company develops most of its value for investors before it ever lists on a public exchange.

Pre-IPO Returns Remain Promising: Private companies remain strong potential value creation vehicles. A recent Forge analysis of 2021 IPOs shows that investors who participated in early financing rounds tend to show positive returns on their investments even despite the current public market drawdown. 1

Benefits of Less Frequent Trading: The private market lacks much of the intra-day volatility of the public market, potentially creating a use case for investors to deploy growth-seeking capital without the pressures of public market price fluctuations.

Institutional investors are increasingly paying attention. A recent study from Oliver Wyman and Morgan Stanley estimates that private market funds will total approximately $13 trillion in assets under management by 2025. New research from State Street also affirms this view, estimating that asset managers and asset owners are planning to increase their allocation to private assets in the next three to five years. While many of these investors focus on “traditional” private assets like private equity, private credit, and infrastructure, at Forge we believe private stock is on its way to taking its place alongside these commonly accepted alternative assets.

What is one thing holding back growth of private assets according to State Street? A lack of “timely and accurate quantitative data for investors.” 2 Forge aims to help investors increase their comfort level with the private markets through Forge Data, our Private Market Updates, and our commitment to transparency in the private markets.

With that, let’s dive into this month’s report.

The Details

Private Market Trade Prices Drag Down Valuation Premiums

Volatility began to set into the public market in late Q4 2021 and accelerated in Q1 2022. Forge saw an 8.9% decline in prices of private companies that traded on the Forge Markets platform from Q4 2021 to Q1 2022. 3 In contrast, the Renaissance IPO ETF lost roughly 31% over the same time period. 4

Table shows a 8.9% decline in prices of private companies that traded on Forge Markets platform from Q4 2021 to Q1 2022 vs 31% for Renaissance IPO ETF

Last month, spurred by the news that Instacart was reducing its valuation by 40%, we began looking at how private companies’ current trade prices compare to their last primary funding round share prices. Valuations are a critical metric in the private market, as companies, investors, and employee shareholders all use it as a quick measure of their company’s growth.

Many companies in the private market continue to trade at a premium to their last primary fundraising round valuation. However, over Q1 2022, that has declined from a 58.2% premium from last round to a 24.1% premium, indicating that broader market conditions are likely weighing on how investors value companies today. 5

Table showing latest Forge Markets trade price vs last primary round

Forge Sell-Side Liquidity Reaches Record Numbers

Investors seeking long-term growth in the innovation economy may look to the private market for new opportunities given public market volatility. Upon doing so, they’ll find a near-record number of companies with sell-side indications of interest (IOIs).

In March and April 2022, Forge Markets saw the highest number of unique sell-side IOIs on the platform, meaning individual companies for whom sellers offered shares. There’s currently a widening dispersion between the expectations of sellers and buyers, creating an opportunity for savvy investors who can pick winners.

Line chart shows an increase of indication of interest coming from sellers, 200+ from unique companies on Forge Markets

Going deeper, the aggregate ratio of sell-side demand to buy-side demand looks similar when looking at the most active sectors on the Forge platform. Sellers outweigh buyers, as noted above, but most sectors show a reasonable balance between the two sides.

With so many unicorns minted in recent years, it’s possible that investors are still becoming familiar with this explosion of companies and are continuing to develop their investment thesis about the asset class, the sector, and the individual issuer itself. This may create opportunities for discerning investors to dig into these names that have excess supply and invest at potentially attractive prices.

Bar chart shows that most of the sell-side indication of interest are coming from the Sales & Marketing Adtech subsector

Sellers Increasingly Offering Shares at a Discount but Holding Steady on Pricing

One measurement that we will continue to look at monthly is the percentage of buyers and sellers seeking to transact at a discount or a premium to a company’s last fundraising round.

For April 2022, we saw a steep increase in the percentage of buyers seeking private shares at a discount, though the discount only ticked up slightly compared to Q1 2022. More sellers are offering shares at a discount as well, but their pricing expectations have not caught up with the rest of the market.

Table showing that in April, 46% of sellers are offering shares at a discount on Forge Markets
Table showing that in April, 64% of buyers are offering shares at a discount on Forge Markets, a drastic increase from 43% back in Q1 2022

No Exit for Unicorns?

With the data suggesting the IPO window is closed, more companies may turn to the private market for liquidity solutions for their employees and early investors. Returns have turned slightly negative for the small basket of companies who went public in the last 6 months, but the dispersion remains wide between investors who got in at the last private market price and those who invested at IPO.

Forge data table showing performance of top US VC backed tech IPOs in the last 6 months, current stock price vs IPO price

It's a new moment in the private market, with record levels of supply, investors charting a new course forward amidst the broader market correction, and the IPO window seemingly closing. There are lots of questions. What does a narrower exit environment mean for today’s private companies? If private company valuations compress on a level with their public company counterparts, does this present an opportunity for institutional players and strategic investors?

To dive deeper into these topics and more, join our live webinar on Thursday at 9AM PST / 12PM EST. Forge CEO Kelly Rodriques will sit down with Blythe Masters (Founding Partner of Motive Partners), and then lead a discussion with Christian Munafo (CIO, The Private Shares Fund) and Ziad Makkawi (Founder and CEO, EQUIAM) on these topics and many more.

1 Forge Data as of 5/1/2022

2 State Street, February 2022

3 Forge Data as of 5/1/2022, as measured by companies that traded on the Forge Markets platform in both Q4 2021 and Q1 2022

4 Quandl as of 5/1/2022

5 Forge Data as of 5/1/2022

About Forge

Forge Global Holdings, Inc. (together with its subsidiaries, “Forge”) is a leading provider of marketplace infrastructure, data services and technology solutions for private market participants. By combining world-class trading technology and operating expertise, Forge Markets enables private company shareholders to trade private company shares with accredited investors. Forge Company Solutions, Forge Data and Forge Trust along with Forge Markets help provide additional transparency, access and solutions that companies, institutional and accredited investors need to confidently navigate and efficiently transact in the private markets. Securities-related services are offered through Forge Securities LLC (“Forge Securities”), a wholly-owned subsidiary of Forge. Forge Securities is a registered Broker Dealer and Member of FINRA/SIPC.

Legal Notices and Disclosures

Past performance is not indicative of future results.

The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s), purchase agreement(s), and other applicable documentation, and will be subject to the terms and conditions and risks delivered in such documents.

This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services. Securities referenced in this article may be offered by Forge Securities, and certain Forge affiliates may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involves a high degree of risk, and you should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.