After a volatile 2022 in the markets, what will 2023 have in store? At EquityZen, we have led access to the private markets for the public for a decade, which gives us a unique view into trends in the private markets and how they may shape the year ahead.
Here are three trends shaping our outlook for 2023.
After a year that saw both public and private valuations squeezed to deep discounts driven by market uncertainty, we expect valuations to begin leveling off, especially for growing private companies.
EquityZen’s internal data showed valuation discounts bottom in November with the average transaction happening at a 43% discount versus the last funding round that month. In both December and early January this discount has decreased to around 37%, suggesting that the market has found a bottom.
As we seek to understand the “new normal” market multiple, recent transactions may also set a precedent. Thoma Bravo bought out Coupa, a public, cloud-based software growing at 20%, at a 8x revenue multiple and 31% premium to the public price. As Tomasz Tunguz explains, “Were the average public SaaS company to trade at the same growth-adjusted multiple as Coupa, the typical multiple would be 11.8x, nearly doubling from today’s marks.” This indicates that we might be nearing valuation bottoms for SaaS companies if we see similar M&A deals in the market. Thus, 10x or greater multiples can still be realistic for fast-growing private companies.
As NASDAQ stated, "Because of 2022’s headwinds, relative valuations may appear more attractive than in recent years. Although still elevated from historical averages, the Russell 2000 Growth and Nasdaq-100 price-to-earnings (P/E) ratios…were at 10.4x and 21.6x on September 30, 2022, near their lowest points since March 2020. In other words, growth and technology stocks may currently be undervalued relative to recent valuations."
Increase in M&A
We expect M&A activity to increase as companies seek exits and acquirers capitalize on attractive buying opportunities.
M&A will continue to be an exit option for private companies. Given market conditions, some companies might prefer to be acquired via a tuck-in acquisition by a larger public company, rather than face raising a down round if they are in need of cash. This could lead to an increase in M&A activity this year. Moreover, due to the more attractive valuation multiples recently, an increase in strategic mergers, acquisitions and buyouts is also likely.
While there was a slowdown in M&A transaction volume versus 2021, Bloomberg Law News highlights that, "the 2023 deal forecast may not be as dreary as some predict. M&A activity in 2021 reached historic levels, and it’s hard to beat records year after year. So 2023—even if slower than 2022—could represent a return to normal in the M&A market." After past booms for the IPO and SPAC markets, we will closely watch M&A activity to see if this becomes the preferred exit route for private companies.
Institutional Interest Will Drive Private Markets
Market volatility has not dampened institutional investor appetite in private market investments. In fact, several market factors are driving private market capital allocations.
Private equity firms continue to have ample capital to deploy in the private markets after raising a record $150.9 billion in 2022. These firms are likely to be strategic in choosing investments, potentially choosing to deploy capital in a non-traditional fashion, such as through minority investments and all-equity deals, instead of pure buyouts. Blackrock notes, "the amount of dry powder in both private equity and private credit…suggests that many companies should continue to have access to funding through a downturn. Those that struggle, however, may prove attractive investments for opportunistic or distressed strategies, which have about US$136 billion ready to invest, according to Preqin."
Family offices and smaller institutions are also driving demand as they seek higher risk-adjusted returns. Further, the challenging monetary policy environment is leading many to seek out venture and growth related deals. According to Finews, "roughly 58 percent of our respondents indicate their family offices have increased allocation to private markets in the last two years...Similarly, over half hold a positive outlook for private market assets over the coming year, by contrast, family offices are much less enthusiastic about public market securities."
EquityZen’s private company marketplace has seen growing activity by institutional investors seeking to take advantage of attractive buying opportunities in the private markets. We expect this trend to continue throughout 2023.
With valuations leveling out, increased M&A activity and growing investor appetite for private investments, 2023 looks to be a maturing year for private markets. Will individual investors follow the leads of institutional investors? Will private companies return to public markets or favor M&A? We will follow these and other trends throughout the year and EquityZen’s marketplace will continue to provide individual and institutional investors alike with more access and opportunities to invest and find liquidity.
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