Secondary markets poised to tick up as bids come back in

Global Intel Hub — 1/29/2024 — Private Markets have seen volumes drop significantly compared to the 2021 high, due to a lack of cash as well as valuations being slashed nearly across the board. Companies like Stripe, Chime, Plaid, and others are trading at significant discounts to their 2021 highs. Only a handful of companies led by SpaceX have maintained positive increases in valuations through the last 2 years.

Jefferies’ Todd Miller expects the secondaries market to have an even stronger year in 2024 with volume at a record level after ending last year on a solid note, according to Pitchbook: [1]

Miller, a managing director and co-head of the investment bank’s private capital advisory group, has high expectations due to the huge pile of dry powder held by secondary investors, an expanding buyer universe, the growing liquidity needs from LPs and improvements in pricing levels. Worldwide secondary transaction value hit $112 billion in 2023, a 4% year-over-year increase according to Jefferies’ latest Global Secondary Market Review. It marks the second highest figure only behind 2021’s peak of $132 billion.

Many investors are underwater in their 2020 – 2021 investments, many of which at higher valuations, so even if they have dry powder many are sitting on the sidelines. But FOMO can change all that, and it seems that the screen is starting to have more green.

“We’re starting to see more buyers coming in,” says Joseph Gelet Sr., Director of Private Markets at Venture Capital Cross [2], “It’s not quite a flood of investors like the frenzy we saw years ago, but it seems like Private Markets are ticking up slowly.”

Although this is not an obvious bull trend, data tracking site Notice.co shows a positive upward trend since the summer lows [3]:

Private Markets are illiquid and thus, are not going to be an exact mirror of public markets, nor are they a leading market indicator. But they are important, and especially because startups and early stage companies represent a huge percentage of new job creation. High growth companies spend money and create new markets, and blue oceans (new markets that didn’t before exist).

Since most VC funds don’t publish their internal portfolio valuation books, it’s hard to determine what returns are for some of the funds. But according to some estimates, some of the larger VC firms can earn triple digits on average per year (including the down years). [4] —

According to our math, if you had invested in every YC startup at Demo Day since the accelerator’s founding in 2005, you would have made a whopping 176% average annual return net of dilution² (practically speaking this would be impossible, but more on that later).

This is far greater than other asset classes and even top-decile venture capital funds:

Sources: GPT-4 Bing plug-in, Rebel data analysis

Below are overall seed-stage YC startup investment returns broken down by year. Even ‘modest’ years like 2010–2011 produced 70–80% average annual returns, and the stronger years like 2012–2013 saw 300%+ average annual returns. The big outlier is 2009 at 2500%+, which included both Airbnb and Stripe (note that was a recession year btw…)

That is certainly a great reason to invest in early stage companies who need growth capital. In fact, most mega caps invest very little in Research & Development. But in many cases, they indirectly do, by investing in young companies (or buying them) who do R&D, through their venture arms such as Google Ventures (GV).

One thing is certain, as evidenced by Argentinian President Javier Milei in a recent speech at the World Economic Forum, Capitalism works. With all it’s flaws, the market works. Free markets are an amazing economic mechanism, and should be made as free as possible.