Private market views

Special Commentary

May 5, 2023

Q1 2023 – Is the “private market correction” coming?

Private equity versus public equity valuation and performance spreads are unlikely to narrow

In 2022 some investors questioned private equity (PE) portfolio valuations as they held reasonably steady, especially in larger buyout vehicles, while public equity indices saw double-digit declines.

However, it’s important to recognize the wide variation in types of private funds and their underlying assets. For example, according to some preliminary year-end data from Neuberger Berman during Preqin’s “Valuations and Performance Trends” webinar:

  • Buyout fund net asset values were up 3.5% on average in Q4 and flat for 2022
  • While Venture fund net asset values fell every quarter and were down 16% on average for the year.

How individual companies fared had a lot to do with their respective operating sector and the quality of their business.

  • Public markets saw wide performance dispersion under the surface. The S&P 500 declined 19.4% in 2022, while more than 30% of the stocks in the index had positive returns.

Similarly, top quartile private market managers benefitted from defensively weighting their portfolios towards companies with external and internal tailwinds.

Graph title is Buyout funds: Sector exposure in 2022. Bar chart shows a comparison of top quartile buyout funds to bottom quartile buyout funds from 0% to 30%. The categories include: Energy, real estate, comm. serv., financials, healthcare, cons. disc., industrials, info tech. the highest percent was cons. disc. at approximately 20 – 25%. The lowest was real estate from 1 – 5%.   Chart shows gradual increase in U.S. Federal tax receipts by year in $trillions from $3.56 in 2016 to $5.21 in 2022.

Explore further:

We outline opportunities we’re seeing in select private market strategies and highlight top-of-mind market developments in the following pages.

  • Private equity value spreads unlikely to narrow
  • Venture secondaries GPs capitalizing on “risk off”
  • Private credit growth spurred secondaries market
  • Performance and fundraising update
  • Innovation continues to democratize private capital

Secondary market opportunities in the spotlight

Private market valuations have an implicit spread against comparable public market companies and their fluctuations are positively correlated to movements in the global stock market. However, private equity performance swings, up or down, tend to be more muted.

Accordingly, final year-end valuations of private investments won’t necessarily reflect as deep of a decline as public markets.

  • Recent research by Hamilton Lane found that since 1990 only one quarter showed negative buyout fund returns when the MSCI World was positive.

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