Private Markets Secondaries Have Begun to Stabilize
It is difficult for any investor to have neglected the astonishing performance of mega-cap tech in 2023, against a very troublesome macroeconomic backdrop. There seems to be little doubt that the prevailing perception among investors is that (generative) AI has the capacity to jumpstart the global economy. This belief will have been reinforced by Nvidia delivering a third-straight sales forecast that vastly surpassed Wall Street estimates in late August.
However, while tech indexes, such as the Nasdaq, have soared, gauges for the pricing of private market secondaries have struggled to escape from the quicksand of 2022, and this disparity is worthy of examination. Public equity exchanges are a secondhand marketplace that match buyers with sellers, and, although the trading arena for private market secondaries is less structured, massive improvements are being made in this respect. So, this begs the question of why buyers outnumber sellers on tech-related stock exchanges when the reverse is true in traded private market secondaries.
To a certain extent, the disparity can be explained by investor objectives -private markets are typically the domain of long-term investors who patiently wait to crystallize substantial value creation, while investors in public equity markets reluctantly accept the principle of ‘set-and-forget’ if they must, but secretly dream of turning a quick buck.
Liquidity also plays a role, particularly in times of economic stress. This brings out forced sellers in private markets, particularly among those who have had skin in the game for long enough to potentially harvest profits if they can find a buyer for their stake even at a significantly discounted valuation.
However, there is nothing that adequately explains the extreme dislocation in the pricing of publicly traded tech and private market secondaries. Particularly when you consider that private markets are potentially a far more lucrative source of capturing the monetization of the latest technological innovations.
‘True stability results when presumed order and presumed disorder are balanced.’
Financial Times Editor
Sentiment has been improving for months…
As the natural order is restored from a state of disorder, the good news for investors is twofold. Firstly, the pricing of private market secondaries has begun to stabilize. Secondly, the gulf in the valuations between public and private market tech is still there to be exploited. This is arguably the most enticing entry opportunity in private markets for at least a decade.
Over the rolling three-month period to July 31, the Forge Private Market Index edged up 0.01%, following 18 months of steep declines. This is the manifestation of improving sentiment that has been evident for several months. Last December, PitchBook observed that institutional buyers were slowly returning to scoop up secondaries.
Furthermore, according to the secondary exchange Caplight, bids for secondary stakes perked up in Q1, and this led to narrower bid/ask spreads. The situation deteriorated once more thereafter, as the regional banking crisis triggered a spate of risk aversion across capital markets (public and private). However, having spiked to a new peak in late spring, median bid/ask spreads have subsequently sliced in half, falling to their lowest levels in 18 months, as illustrated below.
Falling bid/ask spreads are helping to revive buyer interest, with Forge reporting that the percentage of buy-side indications of interest in July edged closer to equilibrium between buyers and sellers. Meanwhile, the potential reawakening of the IPO market, which has been effectively shut down for the better part of two years, also bodes well for the outlook of private markets secondaries. Three companies filed for IPOs in late August, and, according to the Wall Street Journal, the New York Stock Exchange (NYSE) and Nasdaq are competing for potential new listings.
Enhanced transparency and easier access…
The three factors that have restricted investor participation in private markets are a lack of transparency, barriers to entry, and illiquidity. In respect of the latter, it remains true that publicly traded equities are more liquid than stakes in private companies, but the secondary market is becoming increasingly vibrant, and there has never been more opportunity to invest in or dispose of secondaries efficiently.
Increased trading has prompted the emergence of companies, such as Caplight and Notice, which have launched products that track completed secondary deals and bids from buyers and sellers. They offer users a real-time view of how investors value companies – a level of transparency that was previously lacking.
Finally, while the private markets arena was formerly the sole domain of institutional and professional investors with extremely deep pockets, inside connections, and a tolerance for long lock-up periods, the movement toward the democratization of the asset class has reached new heights in 2023. In the second quarter, Stableton launched a first-of-its-kind index-following private market offering – the Stableton Unicorn AMC – with low minimum investments, a streamlined fee scale, and enhanced liquidity relative to earlier portfolio funds.
An unusual alignment…
The alignment of the Sun and the Earth with another planet in the Solar System is a rare event that we can seldom observe in a lifetime. The Sun-Venus-Earth alignment, for example, only takes place once every 100+ years, while the next Sun-Earth-Mars alignment will not occur until 2084.
In investment circles, we are witnessing a similarly rare alignment. Private markets have never been so accessible, more liquid, and less opaque, but there is a fourth element to this unusual conjunction. This is arguably the most compelling entry opportunity in private markets for at least a decade – the price of shares in private companies has begun to stabilize, suggesting we are already in the sweet spot of the current cycle. The dislocation between the pricing of public and private market tech simply has to close out sooner rather than later.
Are you ready to dip your toe in the water?
For more information on the Stableton Unicorn AMC, please visit the page here.
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