Surviving a Period of Upheaval in the Private Equity Market: Investment Strategies from the Forge Global Case Study

As an international financial journalist, I have witnessed many market cycles and the rise and fall of companies. In recent years in particular, the private markets (private markets) have experienced tremendous growth, but have also been exposed to their vulnerabilities. In this issue of the Investment Guide, we take the opportunity of reports that Forge Global, the leading platform for private equity trading, is seeking to sell out to provide business owners and investors with tips on how to build a sensible investment strategy in this turbulent market.

The Turbulent Private Equity Market: What the Forge Global Case Study Tells Us About the Current State of the Market

The private equity market has experienced tremendous growth over the past decade. The news that Forge Global is seeking to sell represents a turning point in this market.

• The old frenzy: valuations of emerging technology companies and unicorns were skyrocketing, and the private markets were flooded with investors looking for the “next GAFA.
• The current chill: The slump in the public market has spilled over into the private market, with many companies struggling to raise capital. There has been a rash of write-downs and layoffs.
• Forge Global’s role: Forge Global has played a role in securing liquidity by providing a secondary market where employees and early investors can buy and sell shares of private companies. However, the overall market downturn has cast a significant shadow over the company’s business model. The share price has fallen by more than 90% compared to when the company was listed on the stock exchange, a warning sign that a “winter period” is truly upon us.

This situation highlights not merely the plight of one company, but the challenges facing the private equity market as a whole. An era has arrived in which valuations that were previously inflated as “wealth on paper” are now being scrutinized strictly based on real-life liquidity and profitability. Investors must face this reality and take a more cautious approach. It is essential to have the insight to identify companies with sustainable business models and solid financial footing, not just growth stories.

The Private Equity Market in Transition: Valuation and Liquidity Challenges

Investing in the private market has different characteristics than in the public market. In particular, valuation and liquidity are key issues that investors should always be aware of, and the Forge Global case study suggests how these challenges manifest themselves during periods of market volatility.

• Valuation challenges: Private companies do not experience the daily fluctuations in market prices that public companies do. Valuations are highly dependent on financing rounds and expert valuations. While they are likely to be highly valued when the market is booming, they are at risk of plummeting in times of adversity. The fact that many unicorn companies have been forced to “down-round” (raise at a lower valuation than the previous round of funding) is a prime example.
• Lack of liquidity: Private equities have limited markets where they can be bought and sold as easily as public equities; secondary markets such as Forge Global provide liquidity, but if overall market demand slows, you may not be able to find a buyer when you want to sell, or you may be forced to sell at a significant discount. This is because employees may not be able to exercise their stock options. This leads directly to problems such as employees not being able to exercise their stock options and cash them out, or early investors not being able to recoup their money.
• Illusion of “wealth on paper “: In the private markets of the past, “wealth on paper” was inflated by high valuations, only to be confronted with the reality that when it came time to cash out, the value was significantly diminished. This is especially devastating to startup employees and to individual investors who invested early in the company.

Investors need to understand these inherent risks and conduct thorough due diligence when considering an investment in a private company. They must analyze the company’s business model, competitive advantages, and the quality of the management team, as well as its financial condition, future financing plans, and exit strategy (e.g., IPO or M&A) from multiple perspectives. Especially during periods of high market volatility, it is prudent to avoid excessive expectations and to conduct a conservative evaluation.

Rethinking M&A Strategy: A New Perspective on Private Equity Investments

Forge Global’s search for divestitures once again highlights the importance of M&A strategy in the private equity market. Periods of market adjustment can create new opportunities for strategic M&A.

• The arrival of a buyer’s market: As the market cools, more companies struggle with cash flow or are forced to rethink their growth strategies. This tends to make acquisition prices more attractive and can be an opportunity for the wise buyer. More companies that are no longer highly valued on the public market will seek an exit through M&A.
• Importance of Strategic Fit: It is critical to find companies that create synergies with your business strategy, rather than simply acquiring inexpensive companies. The objective of the M&A should be clear, whether it is to complement technology, expand market share, or acquire a new customer base, and the goal should be to create value over the long term.
• Improved negotiating power: If the seller is out of financing options, the buyer can negotiate more favorable terms. The key to success, however, is to build a win-win relationship with consideration for the culture and employees of the seller’s company.
• Role of Private Equity: In this market environment, private equity (PE) funds with abundant financial resources and M&A expertise will play an important role. They are actively looking for opportunities to create new value through corporate restructuring and turnarounds.

For business owners looking to invest abroad, private market M&A can be a powerful way to strengthen existing businesses or enter new markets. To do so, however, it is essential to thoroughly assess the potential risks of the target company and carefully plan a post-acquisition integration strategy. Collaboration with legal, tax, and financial experts is also critical to success.

Investing in the Future: Winning Strategies in an Unstable Market

While volatility in the private equity market is an inevitable reality, having the right strategy can help you weather this volatile period and seize future growth opportunities.

Below is a summary of key strategies for succeeding in volatile markets

• Diversify: Mitigate risk by diversifying across multiple private companies and different asset classes (e.g., public equities, fixed income, real estate) rather than concentrating too heavily in any one sector or company. Within the private market, it is also helpful to diversify the timing of investments from early stage to growth stage.
• Long-term perspective: Investing in the private market inherently requires a long-term perspective. Rather than being swayed by short-term market fluctuations, it is important to assess a company’s long-term growth potential and how its business model can remain competitive in future markets. Patience is the greatest weapon in private equity investing.
• Thorough Due Diligence: Again, it is essential to thoroughly investigate the business model, financial situation, management team, market environment, and exit strategy of the investment. Take full advantage of the expertise of professionals (lawyers, accountants, consultants).
• Understand macroeconomic trends : Macroeconomic trends such as interest rates, inflation, technological innovation, and geopolitical risks have a significant impact on the private equity market. It is important to understand these trends and reflect them in your own investment strategy. In particular, investments that take into account environmental, social, and governance (ESG) factors that enable sustainable growth are becoming increasingly important from a long-term perspective.
• Trusted Partnerships: Private equity investments are often difficult to source and negotiate, so building a partnership with a proven venture capital firm, private equity fund, or trusted advisor is a shortcut to success.

Forge Global’s predicament is a sign that the “optimism” of the private equity market has come to an end and an era of “realism” has arrived. This period of change is, at the same time, an excellent opportunity to identify truly valuable companies and realize growth through strategic mergers and acquisitions. Make wise decisions and prepare carefully to ensure your future success.

We hope we have provided some insight to help your business soar in these turbulent times. For more information, please check the original article.