How might Private Company Liquidity be Impacted by Market Volatility?

When the public market experiences volatility, those in the private market may be wondering how it could impact them. During times of market instability, private companies may experience a series of events that impact their businesses, such as a lower valuation or difficulty fundraising. Fewer public listings may also shift to buy-side demand and make it more challenging for shareholders to find liquidity.

What might this mean for the secondary market and companies that seek to use controlled liquidity events to attract and retain talent? Here are a few secondary transaction trends that may occur during times of market volatility:

Overall Secondary Market Transaction Volume May Decrease

On open secondary exchanges, trading volume may decline. For instance, from 2019 to 2021, there were record levels of venture financing and high company valuations which were a contributing factor in increased investor demand for private company stock. During those years, the Shareworks Platform transacted over $10 billion in equity via company-controlled liquidity events. However, as public market volatility increased in 2022, secondary transaction program volume on the platform slowed.

Declining trading volume may indicate that investor appetite for private company stock is waning or, alternatively, it may indicate that asking prices exceed what private company investors are willing to bid. There is no way to know for certain why or when this trend will change in an uncertain market. It could change when investors feel more optimistic about the markets or comfortable with private company valuations, but during periods of volatility, generally, there is likely to be a lack of liquidity for private market shareholders.

Liquidity Pressure May Build

In anticipation of prolonged market volatility, companies may exercise more restraint within their balance sheets. This trend may be attributed to the fact that some companies struggled to raise capital in a volatile environment, inhibiting their ability to use the proceeds of their primary capital raise to fund their liquidity events.1 

Meanwhile, during times of public market volatility, demand for liquidity may build as shareholders struggle to find buyers for their shares. Later-stage private companies may change their plans to go public and wait for more favorable market conditions. This change to a company’s public offering schedule may lead shareholders to ask for partial liquidity to compensate for the change. In addition, equity holders with expiring options or high option exercise costs may look to their companies for liquidity support if public listing plans change.

One of the larger hurdles for companies considering a liquidity event during times of uncertainty may be pricing the secondary. As the gap between bid and ask prices widens, companies may need more sophisticated pricing mechanisms to accommodate both buy-side and sell-side demand.

Regardless of how the market dynamics play out, if we take 2022 as an example, conversations with private company leaders reveal that shareholder liquidity is still a priority even in times of uncertainty. Particularly as companies look to attract and retain talent, rewarding shareholders with patrial, controlled liquidity can be an integral part of equity compensation.

Morgan Stanley at Work specializes in helping companies plan and manage liquidity events seamlessly, effectively and finish with certainty, all within one Shareworks platform. Connect with us to learn how we can help you run your next liquidity event in uncertain market conditions.