Market dislocations are difficult to navigate, almost by definition. These phenomena occur when an economic shock or other disruptive force throws the market off-balance, making it more difficult to price assets accurately. And choppy water is tough to sail.
But, to continue the metaphor for a moment longer, waves don’t always slow ships down. Approach them in the right way and they will propel you forward even faster than before.
Similarly, market dislocations can sometimes create opportunities for savvy investors. However, it takes an informed and strategic approach to capitalize on them. This is especially true in the private secondary market, where both volatility and opportunities abound.First, though, it is important to understand the different ways in which market dislocations impact private companies compared to public markets.
Private market valuations typically lag public market movements, adjusting more slowly and modestly.
This delay occurs in large part because private equity and venture capital firms deploy a variety of valuation methods that help reduce volatility in the face of market swings, such as discounted cash flow models and private transaction comparables. Additionally, private capital continues to flow into private markets, which may cushion valuations against sudden drops.
As such, private market deals are commonly done at higher multiples than those in the public market during periods of dislocation. Private companies can also have higher growth potential than established companies, though it can come with correspondingly higher risks — including business failure, lack of operating history, and limited financial information. And even companies with strong growth potential may never achieve their projected results or provide returns to investors.
But in periods when public companies are prone to volatility and downturns, there may potentially be more growth opportunities in the private secondary markets — provided you take the right approach.
In short: with caution.
Market dislocations make it harder to price assets accurately in public markets. Meanwhile, price discovery is already more difficult in private markets than in their public counterparts.
That’s because liquidity is typically more limited for private securities. There aren’t large, regulated exchanges like the Nasdaq or NYSE on which to buy and sell shares of pre-IPO companies, so trades are slower and it is harder to match supply to demand.
This is beginning to change with the rise of platforms like Augment**, a centralized marketplace for shareholders of pre-IPO companies to find buyers and negotiate sales.
But for the time being, liquidity risks remain heightened on the private secondary market. It can be harder for investors to respond quickly to dislocations and lock in their profits. And with fewer total transactions, private companies can be disproportionately impacted by activity from less experienced or disciplined investors, potentially leading to inflated valuations.
At the same time, market dislocations may create buying opportunities, particularly in secondary markets, where investors may sell off private equity holdings to address liquidity needs.
Private companies can also have higher growth potential than established companies, which may make them better at absorbing valuation multiple compression and allow them to withstand market pressures better.
It is likely unwise to over-allocate to private markets during volatile periods, as this can lead to missed opportunities in future vintage years, a risk of trying to time the market.
However, by doing your own research, maintaining disciplined investing strategies, and focusing on long-term growth, market volatility can present valuable opportunities in private markets.
*This information is provided for educational purposes only and does not constitute investment advice. Investors should consult with their financial advisors before making any
investment decisions.
**Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.