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With the Pullback in IPOs, Shareholders in Private Companies Are Selling — And Prices Are Dropping
With the rise of Forge and other platforms, employees, hedge funds, and other investors are getting liquidity even though the window to go public has closed.
Although current owners might not be so happy, investors that missed out on owning a stake in some of the most celebrated private companies are getting a second chance.
That’s because the investible universe in the private market has never been so big and so cheap. According to PitchBook, the number of private companies valued at more than $1 billion reached 340 in 2021, more than the past five years combined. And they’re now trading at a 20 percent discount compared to the last quarter of 2021, according to the latest monthly report from Forge Global, a private market trading platform.
“If you’re looking to invest in private companies as an asset class, there’s never been a more appropriate time in the last ten years [to do it],” said Andrea Lamari Walne, general partner at Manhattan Venture Partners, a venture fund focused on the late-stage secondary market. She added that discounts were rare during 2020 and 2021 but are now looking “crazy.”
Shares in private companies are subject to a more complicated price discovery process than public stocks. Instead of being traded on stock exchanges, they change hands on third-party trading platforms such as Forge Global, Carta, and Nasdaq Private Market. The rise of such secondary platforms has made it possible for investors to evaluate private firms in a way that goes beyond simply monitoring venture investment rounds or buyout deals.
One of the main reasons behind the sharp decline in private company prices is the slowdown in initial public offerings. Due to public market uncertainties spurred by persistent inflation, rate hikes, and geopolitical conflicts, the number of public listings dropped to 28 in the first quarter of 2022, a “significant pullback” compared to the same period in previous years, according to PitchBook.
“We have a completely closed IPO window right now,” said Greg Martin, managing director at Rainmaker Securities, an investment bank specializing in late-stage private securities trading. The firm was told by Goldman Sachs that it could take until the fourth quarter before the IPO window opens again, according to Martin.
The sluggish IPO market has also created an appetite for liquidity among shareholders in private companies, according to Glen Anderson, co-founder and president of Rainmaker. “The longer the IPO market remains sluggish, the more sellers we see coming to us seeking a sale,” he told II. “[For] example, in the past four months, we’ve seen our sell-side order book double in volume.”
The rising interest on the part of sellers has also been spotted by Forge Global. In January and February, sellers from more than 160 private companies had shares up for sale on the platform, the highest number since March 2019. “As employees and shareholders of private unicorn companies saw exit timelines delayed due to the challenging IPO/SPAC environment, their willingness to list shares at a discount increased,” the Forge report said.
Besides employees, crossover funds with investments in both public and private markets have also been selling private company shares. According to Walne, many such funds have been facing losses from their public investments since the start of 2022 and have had to sell some of their private positions. “They need [cash] to cover margin calls and other things on public strategies,” she told II.
Anderson said that institutional investors could take the chance to “seek bargains” in their private company investments. “The biggest driver of price action in the private markets is the price action in the public markets and the IPO market,” he said. Because the public markets have experienced massive selloffs since the start of 2022, the private markets will likely follow suit and provide investors with cheap admission to pre-IPO companies.