Investors have more capital waiting on the sidelines just as concerns about rising interest rates, liquidity and inflation ease. This confluence of factors will offer significant tailwinds to private market deals in 2023.

Nasdaq Private Market NPM, a spin off of Nasdaq Inc., offers a trading platform that connects investors and bankers with private companies. Its position in the market offers it a rare glimpse into the expectations of buyers and sellers in this opaque segment of the economy.

The company’s recent report found a dramatic shift in private market transactions over the course of 2022. In the first quarter of 2022, 16 percent of secondary share volume was priced at a premium to the seller’s previous funding round. By the fourth quarter, 25 percent of transactions were completed at a discount of 25 percent or greater than the previous funding round.

“Liquidity virtually evaporated as bid/offers widened dramatically and sellers vastly outnumbered buyers,” says the report, describing the market conditions as a “deep freeze.”

As transactions plunged investors saw their capital reserves soar. “Today, there is nearly $300 billion in investor dry capital waiting to be deployed in the private markets,” says NPM CEO Tom Callahan. “We are seeing sophisticated institutional investors begin to deploy capital to take advantage of historic discounts to invest in high-growth, innovative companies.”

Callahan claims his team has received buy lists from large institutional investors recently and the bid-offer spread is also narrowing. “Activity is still recovering slowly, and recent instability in the banking sector is not helping. But regardless, we are seeing early signs of a return to activity in the back half of the year,” he adds.

In fact, the banking sector’s instability may have led to another tailwind for private market transactions. The U.S. Federal Reserve announced the creation of a new Bank Term Funding Program (BTFP) to shore up the banking sector. Eligible banks across America rushed to raise capital from this new program, which has effectively reversed more than six months of quantitative tightening in just a week. The Fed’s balance sheet now stands at $8.64 trillion – the same level as in November 2022.

Meanwhile, the yield on a two-year Treasury bond dropped from five percent to 3.9 percent in just 17 days. All signs point to easing liquidity across the economy.

Low valuations, high cash reserves and easing liquidity could push the private market (and perhaps the entire capital market) from deep freeze to red hot in the months ahead.

-Vishesh Raisinghani