Emerging Signs of Stability - Forge Investment Outlook

Forge recently published its Q4 Forge Investment Outlook, which covers key trends and data in the private market. The report includes in-depth market analytics built specifically for institutional investors.

To dive deeper into the report, Dan Chaparian, VP of Product Marketing hosted Andrew Alden, CFA, Senior Director of Quantitative Research, who offered insights into a quarter that saw signs of strength in July and August lead to softening data in September. Still, there were positive signals for the private market in Q4, as the Forge Private Market Index returned +1.1%, and two VC-backed companies completed IPOs.

Topics covered:
  • The performance of the Forge Private Market Index versus public equity indices

  • Sector and company returns within the index

  • Secondary market activity and pricing

  • Takeaways from the thaw in the IPO market

The Panel
Andrew Alden, CFA
Senior Director of Quantitative Research, Forge

Prior to this role, Andrew launched Semantiqa, an investment management firm focused on the public-market growth equities space. Andrew has also held researcher positions at WeatherStorm Capital and Lattice Strategies (now Hartford Funds).

Dan Chaparian
VP, Product Marketing, Forge

Prior to joining Forge, Dan was VP, Global Product Marketing, for BlackRock's iShares ETF business. He previously held positions at Apple and Uber and is a former startup founder.


Dan Chaparian

Thanks for joining our Forge Investment Outlook webinar covering the third quarter of 2023. I'm Dan Chaparian, Vice President of Product Marketing at Forge, and there's certainly a lot to discuss as we look back at Q3. So I'll turn things over to Andrew Alden, Senior Director of Quantitative Research here at Forge. Andrew, did you see any prominent themes unfold as the quarter played out? 

Andrew Alden

Thanks, Dan. And thanks to you all for joining. Q3 was an interesting one, and it really was a tale of two quarters in one.

For the first two months or so of the quarter, the market seemed to be really finding its footing for the first time post-2021. But by September, some caution had returned. First, recapping Q2 a little. The percentage of indexed companies with positive quarterly returns had been trending up. Trade premium discounts had improved a little after seemingly one-way trend in 2022. And the buy versus sell IOIs were increasing, and IOI spreads were declining.

Q3 initially continued all these trends. And we saw this in Index performance as well.

Having a look at the year-to-date index performance chart, you see that the year began as a long trend downwards, a continuation of 2022. However, near the end of Q2 and into Q3, we start to see signs of a bottoming in the Forge Private Market Index performance.

Then, zooming in on Q3 performance, we even saw positive quarterly index performance, something that was in contrast to major public markets.

NASDAQ 100, for example, represented here by QQQ, or the small cap Russell 2000, which is represented by IWM ETF, the Forge Private Market Index was up 1.1% in Q3, while Triple Q was down 2.7%, and IWM was down even a little more at minus 4.7%. Looking under the hood of index performance, this next chart shows the percentage of index companies that were priced up, down, or flat for the quarter.

What's interesting in this recent quarter is that we still don't see an overwhelmingly strong performance from all companies underlying the index. On the one hand, the percentage of companies with negative returns did continue to decline. Only 41% of index companies had price declines in the quarter, and this was the lowest percentage since Q4 2021. However, the percentage of companies with positive index performance actually dropped a little in Q3 versus Q2 as well. Only 25% of companies were priced up.

So, what's the story here? In short, average positive performances outpaced average negative returns. Winners won more than losers lost. This showed up in a variety of ways, not exclusively in secondary market pricing. It also showed up in the form of some successful exits. Klaviyo and Instacart were both in the index holdings before going public. Klaviyo in particular generated a positive 82% performance from its last private price to its first public closing price.


Thanks for that context, Andrew. It does seem like there are some emerging signs of stability in the private market, but still a bit of uncertainty as well. Zooming out a little bit, in this quarter's report, we released some new data showing longer-term private market returns as measured by the Forge Private Market Index. What does the Forge Private Market Index tell us about performance over a longer time period?


One of the benefits of an index, besides merely understanding the historical returns of the market or investment strategy, is to help us understand the market in a broader portfolio context.

While the Forge Private Market Index was not designed to be directly investable, it can still give us some useful insight into how a well-diversified private market investment portfolio might perform relative to other asset class investments.

Looking at the nearly five years of performance of the Forge Private Market Index, what we see is, even after a strong drawdown in 2022 and 2023, is that a private market exposure still generated strong returns relative to other asset classes.

The Forge Private Market Index generated an average annualized return of 19.2% since the start of 2019, ahead of major public markets, such as U.S. large cap, represented here by the SPY ETF, U.S. small cap represented by IWM ETF, or commodities and bonds represented by the GSG, GLD, and AGG ETFs, respectively. The Forge Private Market Index wasn't the strongest performer we looked at, however. The mega-cap-led U.S. tech sector outperformed it by a few percentage points.

But most interestingly, it did not do so in the same way. While there were some years in which both public market tech and the Forge Private Market Index had positive or negative performance in the same years, the scale of performance and ranking of performance varied. Further, it is perhaps most interesting to see how widely the two markets performed in 2023. And for me, especially this raises interesting questions about the direction of future performance from here.


Very interesting perspective, Andrew.

Now let's zoom back a little bit and dig into the Q3 private market data for companies that are actively being priced and traded on the Forge platform. What did you see in terms of trading activity this quarter?


As mentioned earlier, Q3 was an interesting one for the competing forces of: one, a trend in improving markets; and two, a recent return of some caution toward the end of the quarter.

Looking first at the trends in trade premium discounts, after ending Q2 with a median spread of minus 52%, in Q3, premium discounts bounced around.

Hitting first, a recent high of minus 50% discount in August, before falling again in September to a discount of minus 63%. In July and August, we also saw premium discount improvements at the 75th and 90th percentiles, as companies at the 90th percentile even traded at a 51% premium in August before falling again in September to end the quarter at a 20% discount.

While there's invariably some noise in those metrics, one of the things that was clearly shown in these numbers is the tail of those two quarters. First, some strength followed by the return of some caution.

Turning to our indications of interests or IOIs data, what we saw was directionally similar to what we saw in trade premium discounts. But the IOI data perhaps puts an emphasis on caution rather than fear when looking at the September market.

Where bid/ask spreads had briefly hit a high of 30% in April of this year, by the end of Q2, they dropped to a more modest 18% and that downward trend continued in Q3. In August, they hit a recent low at 12% before moving up modestly to end the quarter at 15%. This put the spread just slightly above the historical average spread of 14%. Once again, a sign of caution, but hardly fear.

The last data point I'll touch on as it regards to trading activity is our Right of First refusal or ROFR data.

Here we saw signs of continued strength as the percentage of companies with insider buying remained elevated in Q2, following a similarly strong Q1. On 22% of companies traded in Q2, the Right of First Refusal was executed, and company insiders purchased the shares from the seller at the previously agreed upon trade price.


So Andrew, another feature of the quarter was that we saw two prominent VC-backed technology companies complete IPOs after a long freeze in the market. What takeaways can you share from the IPOs of Instacart and Klaviyo? And how did their public listings relate to private market pricing that we might have seen on our market?


This was really interesting.

After quite a few quiet months for IPOs, it certainly felt like a lot was riding on these IPOs. And I think most people would say that they were broadly successful. The companies managed to raise significant capital, and many investors will now have all the liquidity benefits of the public market. But success also varies depending on who we're talking about and when they made their investments in these companies.

One thing I really like about some of the data we have and the charting we can do at Forge is that we can look at how prices on these names moved prior to the IPO as well as after it.

This not only can help us develop expectations around the price the company may list at, but it also can help us see what the historical investment opportunities look like. Looking here at Instacart, we can see that an investor buying shares at the start of the year could have made a 34.8% return through the close of the first day of public trading. We also see the path of pricing and how it picked up throughout the year. First, as the company announced a new internal valuation and later in August when Instacart announced its plans to go public.

In 2023, Instacart notably outperformed both the Forge Private Market Index as well as its own transportation sector. In the case of Instacart, the Forge price right before the IPO was actually very close to the eventual first day closing price. But of course, this isn't always the case.

Turning to the Klaviyo Forge price chart, here we're looking at the price-performance of Klaviyo shares since the start of 2022. You can see the company's shares perform similarly to both the Forge Private Market Index as well as the enterprise software sector.

And both were down, and all three were down considerably since early 2022. However, in hindsight, this presented opportunity. The company's shares rose over 100% from their 2023 lows and 82% from their last private market Forge price to their first public closing price. Both these names were holdings in the Forge Private Market Index and made strong returns contributions to the index in 2023.


So, let's wrap with what the third quarter revealed in terms of primary fundraising, which is obviously a core aspect of the broader private market ecosystem. Forge tracks primary funding activity for those companies that tend to be later stage and are covered on the Forge platform. So what did we see in the third quarter in the primary funding market?


The primary fundraising environment remains challenging, though the recent IPOs have perhaps spurred some renewal and activity.

Coming off the low in Q1 2023, where the aggregate money raised and total number of deals in the period hit five-year lows, Q2 and Q3 were both modestly better. But the nature of funding is changing. Down in flat rounds as a share of all rounds are increasing. Additionally, as a new chart in the Forge Investment Outlook shows, investors are also able to demand and receive better terms and stronger protections that were far less common in previous years.

This chart shows the percentage of rounds with liquidation preference multiples greater than one. So we're talking about, in an exit event, investors that will receive a multiple of their initial investment before common shareholders receive any payout. So, what we see here is that in 2020 and 2021, the percentage of rounds with liquidation preferences were very low. 0.6% and 0.3% of primary funding rounds had multiples greater than one.

In 2022, this number rose to 1.3, which was higher, but similar to 2019. But in 2023 so far, this has grown to 5.9% of all new rounds, nearly four times higher than in 2019, the highest of the previous four years. What is also interesting is that we're seeing this on both up and down rounds. So, some investors are willing to pay a higher price for new company shares, but are requiring a liquidation preference multiple for doing so.

If we often think of up rounds as a measure of a positive fundraise, this chart caveats that a little, showing that recently, even some up rounds have characteristics reflecting a weaker company bargaining position and a stronger investor. Perhaps some of these up rounds are not quite as glowingly positive as we might otherwise think.


That's a good question. First, I'd say it's important to note that there's a lot of dispersion among sectors and individual names. So, the private market is not monolithic. There's always going to be some opportunities for the active manager with strong views on particular companies. That said, the space is certainly driven by macro factors as any market is. And probably the greatest catalyst, both positive or negative, is going to be interest rates. And that's obviously driven by the Fed and Fed policy as they fight inflation. And we know how that's impacted public markets. Tech and growth stocks tend to be interest rate sensitive because more of their cash flows are further out into the future. So, we've seen this in how this has impacted all equity markets, particularly hitting some of the public emerging growth stocks the most. And private late-stage venture-backed companies have also been impacted by these forces. So, depending on how inflation, Fed policy and interest rates play out from here, it could be a positive or negative catalyst going forward. The other not unrelated factor that I'd bring to people's attention would be the exit landscape. Uncoincidentally, we saw trade activity and prices pick up at the same time as we had the recent IPOs in Klaviyo, ARM and Instacart. If this thawing continues and we see more companies successfully exiting, I think we might also see public market activity pick up and the valuation environment could improve.


Well, thank you, Andrew, and thanks to everyone who joined today's webinar. If you haven't had a chance to read this quarter's Forge Investment Outlook, we encourage you to do so at forgeglobal.com. And if you would like to go deeper on any of these topics, please reach out to your Forge representative or email institutions @forgeglobal.com, and we'll make sure to get you connected.

Thanks a lot and have a great day.


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