Strong 2015 Followed by a Mild 2016 Create an Attractive Entry Point in 2017
How have investments in late-stage private growth companies performed compared to publicly traded stocks? Can investors generate growth equity returns in the private market? If so, what does the performance of the private growth asset class over the last couple of years suggest about future returns?
At SharesPost, we set out to answer these questions and so developed the first, comprehensive yardstick for the performance of the asset class - The SharesPost U.S. Private Growth Index. The Index is part of SharesPost’s larger mission to provide liquidity to the asset category through a combination of trading, asset management, research, and data.
What we found supported what many in the venture-backed ecosystem have been saying for a while — there is clearly opportunity for investors with longer-term investment horizons. On a cumulative basis, the Index increased approximately 74.8% from Jan. 1, 2015 through March 31, 2017. This compares to an increase of 14.8% for the S&P 500 and an increase of 29.8% for the Dow Jones U.S. Technology Index.
The Index starts at a value of 100 as of January 1, 2017. To provide a historical perspective, we created a hypothetical Index for 2015 and 2016 by applying the same methodology and eligibility criteria. In the charts below, we illustrate the summary. The number of private tech growth companies that qualify to be included in the Index has increased on a year-over-year basis. Effectively, the total market capitalization of the companies in the Index has also increased. The key takeaway is that, on a cumulative basis, our hypothetical Index would have increased roughly 74.8 percent from January 1, 2015, through March 31, 2017. This increase is comparable to an increase of 14.8 percent for the S&P 500 and 29.8 percent for the Dow Jones U.S. Technology Index. If we zoom in to the most recent five quarters, we notice that growth rates in the valuation levels of private growth companies have lagged behind their public market counterparts. Viewed another way, the recent modest performance of private growth companies may create an attractive entry point for investors looking toward the end of 2017 and beyond.
Macro trends in VC ecosystem point towards more investment opportunities
An objective, independent measure of the market is critical because the private technology growth sector has experienced a remarkable paradigm shift since the Great Recession of 2007 and 2008. In our recent reports, we have highlighted key trends and factors that have led to the proliferation of “unicorns” and the emergence of the new “private tech growth” asset category. In particular, as we note in the two charts below, the supply and demand curves for private growth capital have changed significantly, leading to a record-high level of funding and fundraising activity.
These game-changing trends, coupled with the recent uptick in billion-dollar acquisitions and IPOs, provide greater conviction that we are in the middle of a longer-term, fundamental change in the way growth capital is raised, managed, and harvested. We believe there is a growing need for an objective, quantitative indicator of the health of private tech growth companies in the U.S. For more information about our thoughts on VC funding and fundraising trends, refer to our white papers entitled “Birth of an Asset Class” and “Rise of Unicorn Funds.”
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