New Valuation Data Show Private Companies Weathering the Downturn Better Than Public Peers

Private companies may not be the perfect haven amid rising uncertainty, but they have hung onto their value better than their public market counterparts. 

Investors are getting more comprehensive and timely data on the valuations of private companies, thanks to the rise of marketplaces to trade shares. According to the latest report from Forge Global, the average price of companies trading on the platform dropped 8.9 percent between the last quarter of 2021 and the first quarter of 2022. Meanwhile, the price of newly-listed companies measured in the Renaissance IPO Index plunged 31.2 percent as the public markets sustained substantial price corrections in the past few months.

Forge also found that private companies continue to trade at a higher price than the last time investors came in through a primary funding round. But the premium between the current price and the last valuation has declined from 58 percent in the last three months of 2021 to 24 percent in the first quarter. 

“With the recent public market selloff, the private markets look like more of a safe haven than they did even before,” said Blythe Masters, founding partner at Motive Partners, a private equity firm focusing on growth equity and buyout investments. 

Returns for U.S. initial public offerings in the last six months dropped to an average of -1.7 percent, if shareholders had invested in the companies before they went public, according to Forge. But returns would turn to deeper losses, - 61 percent, if investors only started pouring in capital after the companies’ public debuts.

Some Investors are going after discounts. The investible universe in the private market has never been so big and so cheap. Instacart, for example, reduced its valuation by almost 40 percent in March. According to the Forge report, 39 percent of buyers of private company shares were willing to offer their stakes at a discount in the first quarter. That number rose to 46 percent in April, with 62 percent of buyers seeking to purchase private shares at a discount. 

“Good companies are being treated the same way as bad companies,” said Ziad Makkawi, founder and CEO of the San Francisco-based investment manager EQUIAM, in a webinar hosted by Forge on Thursday. “That’s where we are seeing a lot of opportunities right now, being able to discern the good ones and the bad ones.” 

Christian Munafo, chief investment officer at The Private Shares Fund, added that the room for error has gotten smaller for private market investors amid heightened volatility. “We had a lot of nontraditional investors vacationing in our markets in recent years, but the vacation is over,” he said in the webinar. Indeed, private market investments have been outperforming so much since 2000 that it has become hard to tell if managers are skilled or lucky. But Munafo said historically more sophisticated and patient investors in the private markets have invested during volatile and uncertain times and generated outperformance during the subsequent years.