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.
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.
Please Read These Important Legal Notices & Disclosures
The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "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) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.
To the extent information about or defining specific terms is provided herein, Forge makes no representations as to its accuracy and has no duty to update such information. Such information is based on Forge’s experience and the meanings and connotations of terms as Forge typically uses and interprets them. Others may construe such terms differently, and you should do your own research and consult with financial, legal and tax professionals regarding any such concepts included herein.
This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities LLC 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 LLC, member FINRA/SIPC.
Forge Securities LLC is a wholly owned subsidiary of Forge Global, Inc. Certain affiliates may act as principals in such transactions. Forge Data LLC is an affiliate of Forge Global, Inc. and Forge Securities LLC.
Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors 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.