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Perspectives on the Private Market: Growth, Secondary Trading, Regulation and 2023 Outlook

Rosenblatt’s perspectives on the fast growing and evolving private market

Key Observations:

Buyer/Seller Dynamic in Secondary Market for Private Securities
• The gap between buyer/seller expectations for private securities in the secondary market hit a record high in late 2022 with buyers asking for a 52% discount from the last valuation but sellers willing to accept only 32%. But this gap has narrowed in the last 45-60 days improving prospects for matching trades in the secondary market
• According to Forge, private shares in the secondary market were getting ROFR’ed at a higher rate in December and January which could be a signal that insiders think valuations have bottomed and could start trending upwards

Trends in the Secondary Market
• Employees of Unicorns continue to offer their RSUs on private networks to generate liquidity and monetize their equity in the face of weaker prospects for an IPO or an exit through M&A, and valuations of their companies still grinding lower
• With private firms still not keen to raise capital in this weak environment concerned about down rounds or doing deals with “structure”, VC/PEs wanting to deploy their dry powder are having to look to private networks to invest through the secondary market

 Regulatory Pressure
• SEC’s Crenshaw is ratcheting up pressure on the Private Market focusing on four issues: 1) lack of investor protection, 2) weak market structure, 3) lack of corporate governance, and 4) Reg D protection for private fundraising is crowding out SMB/SME funding  
• SEC is working on a rule allowing investors to sue VCs for negligence or inadequate due diligence, making investors liable for failures at startups they back. This could have major  implications: limiting the terms VCs can negotiate with LPs, and making it tougher to raise funds

Prospects for 2023
• Large banks and asset managers (Blackrock, Goldman Sachs, Morgan Stanley) are continuing to raise record amounts of PE-funds which means they see continued opportunity in this asset class, and it ensures that adequate dry powder is available for the next few years
• The six major networks that trade private shares on the secondary market (CartaX, EquityZen, Forge, InvestX, Nasdaq Private Markets, and Zanbato) are expecting a stronger 2023 after an anemic 2022. Six bulge bracket brokers with dedicated PE trading desks are also bulking up their capabilities
• Meanwhile, the IPO window is showing some signs of opening up with over 1200 Unicorns waiting in the wings and many keen for an exit through an IPO/SPAC/Direct Listing. But uncertainty remains with the next two quarters critical in determining how 2023 turns out.

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