Private markets may experience relief in the coming years
Private markets have thrived under robust tailwinds post the Global Financial Crisis. Valuations have exhibited rapid growth propelled by a low-interest rate environment and ample credit availability. Even amid the pandemic-induced economic slowdown in 2020, private markets rebounded in the latter half, marking an extraordinary resurgence that continued into the exceptional year of 2021.
The trajectory underwent a shift in mid-2022 as the Federal Reserve responded to mounting inflationary pressures by implementing a 75 basis points hike, bringing the key rate to 1.5% – 1.75%. Consequently, private markets witnessed a stark downturn, with deal volumes plummeting, performance waning, and valuations experiencing a notable decline, particularly in select sectors. Over the entirety of 2022, private equity deal volumes contracted by 26% compared to the preceding year, while global fundraising in private markets registered an 11% decline.
The trend persisted into 2023, with the key rate reaching a notable 5.5% by November. Private market valuations mirrored this shift, witnessing a corresponding adjustment. In the segment of venture-growth, the median pre-money valuation experienced a substantial 65% decline, plummeting to $373 million from its record high in 2021.
The challenging phase appears to be waning, with prominent investment banks such as Morgan Stanley and Goldman Sachs anticipating a reduction in inflation and interest rates. Morgan Stanley’s research forecasts a commencement of interest rate cuts by the Federal Reserve in June 2024, aiming to bring the policy rate down to 2.375% by the conclusion of 2025. In alignment with this, Goldman Sachs predicts the policy rate to conclude 2025 at 3.9%.
Considering the forecasts outlined above and the existing depressed private market valuations, 2023 emerges as a favorable opportunity to get exposure to this asset class, particularly within the venture-growth segment.