Being a lifetime student of capital markets and technology has its benefits (at least being a lifetime student does), for as I get older, and my network grows, I have more opportunities to get closer to the really smart people in the room whose opinions I tend to weigh above others in the areas I’ve built my business around. So while attending a recent LP conference hosted by the multi-vehicle, but ostensibly long-short hedge fund ABS Global, I got to listen to the perspectives of the same fintech, digital payments and B2B software investors I deal with on a daily basis, except that they’re not sitting on the other side of the negotiating table – they’re pitching LPs on why they should invest in their various funds, and held to account to answer LP questions as to the soundness of the investment strategies they deploy and their predictions for the next 12 months. It’s an interesting dynamic and tremendously valuable, especially when you get to hear from the leading investment manager of a fintech/B2B software crossover fund, whose parent company has positions in over 60 public and privately held companies, to the tune of $80 billion AUM. The breadth and depth of asymmetric information this person has access to is almost unfair to the rest of us, but for the fact that that access was well earned.
On one particular point I found his insights particularly astute, that being his prediction that 2025 will finally see a post-pandemic thaw of the fintech and B2B software IPO market, and the rationale behind it. The backdrop to this was the CIO disclosing to a room of investors that his firm hadn’t pulled the trigger on a private market deal in over a year. And yes, this did evoke verbal “oohs and ahhs” aplenty. But the logic behind the lack of allocations to private market deals made sense when he explained it.
First, and probably of no surprise to readers here, the underlying cause for this private company investment dislocation has been valuations. The delta between the buyer’s bid and the seller’s ask price has been too substantial to bridge in the past few years, where sellers have been anchored to the ridiculous frothy valuations of the pandemic years, and buyers have been (still) licking their wounds from investments made at this time which were based on detached-from-reality multiples of topline revenue. You may have heard of this formulated as “valuation doesn’t matter, the company will grow into it.”
FYI , many private equity and venture capital investors are still proffering that rationale to explain away unrealized losses on marked-down assets that they continue to hold on to. And of the rest? A future of downrounds, continuation funds, or liquidations are likely in the offing.
Secondly, the private market valuation piece feeds into the immediate cause for the lack of allocations: a lack of liquidity for exits. There’s no safe harbor for a CIO who buys high in the private markets and exits low into the public. Hence the argument for a) not making private market investments, and b) because the public markets are a forward-looking indication of valuations, and in many verticals like fintech, digital payments, and enterprise software these valuations have normalized, there’s nowhere to go if a fund wants to be aggressive on a private market deal.
So what’s the signal that’s telegraphing a thaw in the public and private markets?
Well, before I disclose, let me remind you one more time of the advantages of being a banker and an LP: getting the real perspective from the market’s best investors.
A thawing fintech IPO market is the logical consequence of a shrinking bid/ask spread in the private market. And that’s exactly what these fintech and software investors are seeing. Founders are finally beginning to yield ground on valuation expectations (normalizing from the highs). Whereas 6 to 9 months ago, buyer’s bids were rejected outright, founders are now coming back to the table with more reasonable valuation expectations. And as this bid/ask spread continues to shrink, it will unlock deal flow, open up public market exit opportunities (liquidity), and the whole frozen system will begin to thaw out.
