Howe Ng, Head of Data & Analytics for Forge Global, discusses how private market investors view price dispersion or the bid/ask spread in both an up-market and a down-market.


Howe NgHead of Forge Data & Analytics

So, VC deals and IPO events or exit events are actually very important indicators in terms of how someone discovers what the right pricing is when it comes to the private market. There is a lot more flow, a lot more deals getting done. It's a lot easier for an investor or market participant to observe where the pricing levels are.

So, when deals are drying up, fundamentally there is just a lack of data in the private market for you to do all sorts of things - from investment evaluation to coming up with the right price for the deal.

Data is important in both up and down market. But in the case of an upmarket, everything is moving to the right and up. So, a lot of times people are basically chasing ever-growing bubbles in the up market.

There is very little dispersion in prices because everything is just being sort of driven up, which is what we saw in the last couple of years. In a down market, when the prices are falling, there's usually more dispersion in terms of where things are being traded. Companies are no longer just trading at the same price in the same direction. When that happens, the availability of data is instrumental for an investor to be able to pick out the right companies and the right entry and exit points.

In the private market, there are a couple of things that we like to look. One is trade prices, the other one is bid prices. When you look at trade prices, you're assessing prices people actually paid for, past tense for a piece of security. When you look at bid prices, you are looking at the same security but what people are willing to pay for. So, one is a backward-looking metric, the other one is more of a forward-looking metric.

So, if you look back at a set of prices; let's say people were willing to pay for a piece of securities was $100 forty-five days ago - those are trade prices. And when you look at bid prices for the same set of securities, if now the price is at $50, you can actually think that the market is no longer willing to overpay $50 for the same set of securities as forty-five days ago. So those are the two things that we actually look at.

It gives you a sentiment from an investor perspective, what people are willing to pay for before and what people are willing to pay for going forward. It's all about price discovery. To the extent that these two sets of prices actually converge, that means you probably find equilibrium in terms of this is actually the right price for this security at this moment.

About the Author

Howe Ng is Head of Analytics and Investment Solutions at Forge Global. Prior to joining Forge, Howe spent 16 years with BlackRock where he led Production Innovation for the firm’s iShares ETF business and held key roles in the Systematic Active Equity Portfolio Management team. Read more from Howe.

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