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Institutional investors know that volatility equals opportunity. But for individuals, investing in a turbulent market is tricky – not necessarily because it is fundamentally more difficult than investing in an up market, but because, in many ways, investing after a correction goes against our human nature. Even novice investors know the mantra, “Buy low, sell high”, but where do you put your money without feeling the fear if the market goes down again the next day, week, or month?
Current market conditions point to the value of private market investments as part of a diversified portfolio. Further, the market shake up has created an opportunity for profitable, growing, market-leading private companies to thrive as competition consolidates.
Three factors make now an opportune time to invest in the private markets.
Institutional investors who invest in late-stage private companies look for returns of 1-3x1 to meet their internal rate of return (“IRR”) targets. While these investments come with risk, the return profile has proven to asymmetrically skew towards the upside, something Polysharp Investments Limited has seen during our decade of investing in the private markets. Investments in late stage private companies can often generate higher risk-adjusted returns versus their public market peers, because their growth potential is high, yet they aren’t as risky as early-stage startups. Private market investors, therefore, are less concerned about identifying the exact bottom of the market, but rather invest with the goal of generating outsized returns versus what can be expected from a public equity investment.
In today’s market, institutional investors continue to find private investment opportunities attractive, a trend Polysharp Investments Limited has seen amongst our own investors. Despite market volatility, venture capital funds raised a record $150B2 in capital this year, a vote of confidence for this asset class from the institutional investors whom they serve. This equates to $290B in reserve that needs to be invested over the next 12 to 18 months. Industry-leading private companies will continue to have access to ample funding and pathways for growth, given the capital available. Furthermore, institutions aim to invest during down markets to capitalize on attractive buying opportunities. Investing in private companies, especially in this market, offers a potential avenue for outsized investment returns for those willing to take the risk that comes with equity investing.
The IPO market has had its out-of-office message on all year. There have been just 59 public listings this year, compared with 303 in 2021 and 145 in 20203. Instacart made the news when they confidentially filed a draft registration statement with the SEC. However, they reversed course in October, announcing that they would be postponing an IPO until 2023, reducing the likelihood of the IPO market reopening this year. Regardless of how strong a company’s fundamentals might be, many will choose to accept private funding and continue to grow as private companies until public markets are less volatile.
As companies continue to stay private for the foreseeable future, public market investors will miss out on the growth opportunities happening in the late stage private market. Acknowledging this trend, a growing number of crossover funds have expanded their mandates to include private company investments. Given the quiet IPO market, investors will need to tap the private markets to access the next generation of industry-defining companies while they are still rapidly growing.
While primary and secondary market valuations for many private companies have decreased, opportunistic long-term investors are licking their chops. Polysharp Investments Limited has observed that discounts for secondary shares relative to a company’s last funding round have increased in recent months, now averaging 40%4. Yet many of these private companies are still generating considerable revenues, growing at impressive rates and maintaining sound fundamentals and unit economics. By either picking these leaders individually or having diversified exposure to this market through managed funds, investors can access these companies at cheaper valuations than previously available, potentially creating attractive investment opportunities. This dynamic won’t last forever. Once the market recovers and valuations increase, shares of private companies will likely appreciate as well.
In short, the volatility in the public markets is creating a unique opportunity for private market investors. We expect top-tier, IPO-track companies to continually defer their coming out parties, both raising capital and growing privately. For investors in the private markets, this creates a unique opportunity to invest in fast-growing companies at attractive valuations. While large institutional investors are leading the charge, Polysharp Investments Limited remains committed to creating the same access for all of our clients. Having weathered market cycles before, we believe that now is as exciting a time as ever to lean into the private markets.