After another year in which Fed actions played an outsized role in driving market performance, investors cheered the possibility that 2024 could see the central bank achieving its goal of taming historically high inflation while avoiding a recession.1 In December, investors seized on dovish Fed comments2, and the S&P 500 rallied 4.4% for the month, bringing 2023 gains to 24.2%.3 The private market has not enjoyed the same lift, but investors seem to be adopting a more risk-on positioning, which could lay the foundation for a potentially stronger 2024.
In December, the State Street Risk Appetite Index rose from 0 to 0.24, which may indicate that institutional investors have moved from a neutral position toward a positive risk appetite.4 That shift includes a decrease in cash holdings, down 1.2% from recent highs in October 2023. However, State Street points out that cash holdings are still more than 1% above the long-term average, with the potential for money to flow back into asset markets if conditions remain compelling. If that happens, the private market might be able to close the performance gap with public equity markets.
The gap between the private and public market widened further in Q4, as the Forge Private Market Index (“FPMI”) closed out Q4 down -5% and -20.2% for 2023.5 We believe the divergence was primarily due to formerly high-flying private companies in the FPMI falling back to earth during the quarter.
Declines in two names in the FPMI had an outsized impact on the overall performance for the quarter. Digital freight company Convoy (-100%) and food technology company Indigo (-90%) together accounted for half of the overall -5% decline of the FPMI.
Convoy — once valued at $3.8 billion — announced in October that it was ceasing all operations.6 Freight logistics company Flexport (-51%) acquired Convoy’s technology platform7 but fell along with broader weakness across the Industrial sector (the weakest FPMI sector for the quarter).8 Data science and AI platform Domino Data Labs (-36%) and customer data platform Tealium (-31%) also declined significantly.9
On the positive side, Postman (+47%), an API platform for software developers, and fintech companies Mercury (+16%) and Stripe (+16%) all posted strong performance in the quarter.10 Other potentially green shoots emerged as well, as the quarter saw increased trading activity on Forge Markets from prominent AI companies OpenAI and Anthropic.11
The gap between the top performers and the rest of the pack in the FPMI somewhat mirrors what’s happening in the public markets, with the “Magnificent Seven” stocks responsible for most of the S&P 500’s gains in 2023. These seven companies — Alphabet, Amazon, Apple, Microsoft, Meta Platforms, Nvidia, and Tesla — gained an average of 111% in 2023, compared to the S&P’s total average (buoyed largely by these seven) of 24%, as Kiplinger reports.12 Meanwhile, 72% of S&P 500 companies lagged the index, as MarketWatch reports.13
This divergence could also take shape in the IPO market. Pathways to going public could improve in 2024, but big names might have an easier time. All eyes are on well-established private companies like Reddit and Discord, which many investors believe will complete IPOs in 2024.14
December was a slow month for companies going public, but overall, IPOs picked up in 2023 compared with the doldrums of 2022. In 2023, 108 companies completed IPOs, compared with 71 in 2022, according to Renaissance Capital. Still, that’s below the pre-Covid total of 163 in 2019.15
Altogether, the conditions may be ripe for a more positive 2024 for private companies, but it wouldn’t be surprising to see continued bifurcation. Companies that have been able to navigate the tough economic cycle could be well-positioned to take advantage of falling rates and increased investor risk appetite, while others may face tougher roads ahead.
Core private market metrics offer reasons for optimism
In December, the bid-ask spread rose roughly 1 percentage point from the prior month to 11.4%,16 matching the three-year average for January 1, 2020, to December 31, 2023. The median spread has come down significantly from the 2022 average of 17.4%, suggesting that buyers and sellers could be moving closer in terms of valuations.
During December, the median trade premium/discount to the last primary funding round for private companies stood at -46%.17 But looking only at the median does not tell the whole story. Companies at the 75th percentile traded nearly in line with their last primary round valuation, while those in the 90th percentile traded at a 35% premium. On the other end of the spectrum, companies in the bottom 10th percentile traded at -80%.
In the third quarter of 2023 (the latest period for which data is available), 10% of companies exercised their Right of First Refusal (“ROFR”). This decline follows two quarters of elevated ROFR rates, suggesting that internal buyers may still be cautious about valuations.
Private companies raise capital, but at a cost
During Q4, the median private company on Forge Markets that raised primary funds did so at essentially flat levels. For private companies that achieved the highest valuation growth, post-money valuation step-ups were only 2.2x, reaching a new five-year low. These levels suggest that the fundraising environment remains investor friendly.
The number of companies with sell indications of interest (“IOIs”) on Forge Markets declined slightly in December, though the total has remained relatively stable for most of the year.
Meanwhile, December saw the highest percentage of buy IOIs on Forge Markets since late 2021, and the proportion of buy and sell IOIs was roughly equal for the first time in nearly two years. This follows a long period of significantly more sell IOIs than buy IOIs, suggesting a more balanced market and higher demand, both of which could be positive indicators for the private market going into 2024.