Marcus New is CEO & Founder of InvestX.
What were the key themes for your business in 2022?
The private equity market is one of the fastest growing asset classes with an estimated $9.3 trillion AUM last year. Just ten years ago there were fewer than 100 private companies with a billion-dollar valuation, yet with companies staying private two times longer than in 2005, there are now more than 1,200 companies valued at more than $1 billion with a total cumulative valuation of $3.6+ trillion. While there’s massive opportunity in the private markets, accessing these markets is still a challenge for investors.
InvestX continued our focus this year on improving how our broker dealer clients invest and transact in the late-stage private markets and bringing transparency and trust to an opaque marketplace. Technology is helping improve these currently inefficient markets. For the more than 60 broker dealers on our platform, InvestX is improving price discovery and helping our institutional clients facilitate trade execution. In addition, we are seeing an increased number of wealth management firms offering InvestX single and diversified fund products to their clients.
What are some of the biggest trends in the private vs. public markets in 2022?
Private markets and public markets have a strong correlation, but also some significant differences and we saw these play out this year. The most surprising trend was the lack of trading and liquidity in the secondary markets. Theoretically, you would expect that if there were few IPOs, the secondary markets would become more active as the primary form of liquidity for existing shareholders. Surprisingly, this was not the case in 2022. With the uncertainty of the recession, war, inflation, etc., institutions went to the sidelines and the few that were buyers, had low priced bids. At the same time, sellers with longer time horizons for their investments had anchored valuations from 2021 and were unmotivated to lower pricing expectations, creating a frozen market with bid-ask spreads over 20% apart. Late in Q4 the gap started to narrow as shareholders who needed to sell looked for bids which set new lower trading prices.
The second trend was how the majority of private companies were able to hold their valuations. 2021 was a massive year of capital raising for companies. With the recession looming, in Q2 companies started making cuts to their cost structures to extend their balance sheets and avoid refinancing. Those who had to refinance like Klarna ($42B to $6.3B) took very large valuation cuts. This essentially gives private companies time to grow into the new valuation reset that has happened in the public markets.
What are your expectations for the private markets in 2023?
2023 will be the year that banks become more active in the private markets. The world’s largest firms are creating dedicated private equity desks to help their institutional clients transact in the private markets. JP Morgan jumped to the early start in 2021, with many firms joining in 2022, we expect 2023 to be the year where all the major firms are building more dedicated expertise to more actively participate in this emerging multi trillion-dollar asset class.
The IPO markets will stay closed and secondary liquidity will pick up. After spending 2022 with few IPOs and little secondary trading, the pent up demand for liquidity will force prices to meet low bids in the inefficient private markets. This will be accelerated by both the large number of tech employees laid off who may need to sell their stock option shares, and early-stage VCs who will be in the second year of few exits but extreme built in profits, who will look to exit at lower prices in 2023.
This coming year will be an incredible vintage for funds making investments. InvestX late in 2022 launched its fourth fund to mirror our previous fund launched during the pandemic, which took advantage of deeply discounted pricing for world class companies. With the lack of buyers, price discovery and liquidity, patient institutional investors could create one of the best vintages for returns in a decade.
As private equity trading evolves, InvestX sees that by combining technology and human expertise, utilizing tools for operational efficiencies, and providing more access to data and information, these markets will continue to become more efficient in 2023.
