Suraj K. Gupta is President & CEO of Rogue Insight Capital, an investment firm focused on supporting diversity, innovation and social impact.
This year has been a challenging one in the markets. Though public equities have gone on an incredibly bullish run, private markets have been another story. All year, the markets have found reasons to be skittish, with the largest underlying factor being uncertainty. Uncertainty around when inflation will taper, when the Fed will begin rate cuts, and who woulc become the 47th president of the United States.
Uncertainty often leads to market volatility, as investors are unsure of how to invest and what risk factors exist. This volatility has led to deal volume in the venture capital landscape plummeting and overall valuations lowering to their lowest level in eight years. A report from PitchBook and NVCA showed that VC-backed IPOs had a median price-to-sales multiple of 4.9x from 2022-24, compared to a staggering, though completely unsustainable, 12.6x from 2020-21. M&A activity was down 50% from its 10-year average in H1 2024, and global IPO activity has been trending downward for the last two years.
Opportunities Amid Market Challenges
Despite the uncertainty and headwinds for private investment, 2024 has proven to be a year of opportunity, as a slowdown in deal volume and lack of investor confidence in private markets has led to a lack of competition for investment opportunities. I believe this will continue and that we are now facing a fantastic time to invest in private deals.
At the private market peak in 2020-21, valuations and deal flow hit incredibly unsustainable levels. In my capacity as CEO of Rogue Insight Capital, I witnessed firsthand that investors were piling into deals without doing nearly enough diligence. The shared mentality seemed to be that investors had a fear of missing out on deals, which fueled a bubble. We have seen this play out before, ranging from the 2000 tech bubble to the 2007 real estate crisis in the U.S. Each time, the market goes through a painful correction period that provides a phenomenal investment opportunity for the bold. Those who are patient through unsustainable valuations and brave in times of uncertainty can often generate above-market returns.
I currently see a large disparity in certain public and private market sectors. U.S. public markets are trading at all-time high valuations, with the Nasdaq trading at a precipitous 42x price-to-earnings ratio in October 2024. The public market seems to be pricing in unsustainable growth, and it has been historically rare in any industry globally for these types of multiples to sustain. At some point, growth numbers or investor impatience with a lack of returns typically catch up to these prices.
Shifting to the private market, although AI deals are still incredibly expensive, many other industries have come down significantly in value. Fundraising has been a tough endeavor for private firms, as deal volume has fallen while investors grapple with higher interest rates and inflation. From the deal flow I have seen this year, many firms have elected to delay large, broader fundraises until the market improves and have instead opted to raise smaller, internal, investor-friendly rounds to bridge themselves until then. I believe this has provided a fantastic opportunity to double down into companies we like at very attractive entry points.
Preparing For A Rebound
The market tends to ebb and flow, and we are seeing signs that we may be at an inflection point before a period of sustained success and liquidity in the private markets.
If we consider the Great Recession as an example, the real estate market became incredibly overheated leading up to 2007. There was far too much liquidity, with too much demand chasing too few deals, and this led to fundamentals being tossed while investors piled into deals. When the correction hit, real estate prices tanked as liquidity dried up and investors ran for the exits. However, over the next few years, interest rates were cut globally, liquidity began returning, and previously depressed real estate began to skyrocket. Those who were not afraid to invest in the aftermath did very well.
I believe we are seeing the same signs for private markets that we saw in the real estate markets in 2010-2011. The uncertainty that the market priced in through 2024 seems to be behind us. World banks have begun to cut interest rates, inflation is receding in most G8 countries, and significant global electoral outcomes have either been decided or are around the corner. When this uncertainty recedes, I believe we will start seeing an increase in IPO and M&A activity, which are the two principal sources of liquidity in private markets. With lower interest rates spurring investment, lower inflation encouraging investors, and a return of liquidity to the market, I think we have the formula we need to jump-start the private markets once more. We have already seen developing countries such as India have their IPO markets reopen in a big way and North America does not seem far behind.
If you are an investor considering private investments, you might see great opportunities in high-quality companies that are raising smaller rounds. High-margin firms with a sustainable competitive edge that are best managing their cash flows should be well-positioned for success over the coming years. Further, many industries are trading at 30x to 40x price-to-earnings ratios publicly and a far lower ratio privately (as seen from the above Pitchbook data). For private companies that are considering an IPO, this gap needs to shrink one way or another, and I would rather be on the side with the tailwinds!
Though market uncertainty may persist a while longer, particularly as we grapple with the question in North America around a recession vs. a soft landing, I believe the window of opportunity to invest in private markets remains, but it will not be open forever. One of history’s greatest financiers, Warren Buffet, once said that investors should “be fearful when others are greedy and greedy when others are fearful.” It is beginning to look like a great time to start being greedy.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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