MARKET TENOR
“Buy the rumor, sell the news” goes the long-time Wall Street saw that applies to publicly traded securities, but not private equity and credit. We are generalizing here, but stocks have been supported by a soft consensus that the economy will avoid a hard landing and that the Fed may pivot to rate cuts in 2024 (i.e., the 2022 hope about 2023). Likewise, credit has benefited from the soft-landing narrative as credit spreads, especially CCC, have narrowed this year. Arguably, a lot of potential good news is already reflected in security prices.
Or is it?
As of November 29, the S&P 500 and NASDAQ have gained 19% and 36%, respectively, year-to-date. Tech stocks anchor both indices. After a miserable 2022 for tech stocks, tech powered by the “magnificent seven” mega caps has pulled the market cap-weighted indices higher as many stocks have struggled. The equal-weighted S&P 500 (+4%), S&P 400 midcap (+5%), and Russell 2000 small cap (+2%) indices have ground out nominal YTD gains after a tough first quarter.
The setup for year-end valuations of private equity and credit, in one sense, will be supported by stronger equity markets and tighter credit spreads. On the other hand, down round valuations for venture-backed companies that raised capital in 2023 and depressed M&A and IPO activity will weigh on the year-end marking process. We expect the year-end marking process to be challenging, especially for companies that need to raise equity capital in 2024 to cover negative cash flow. Comp multiples are lower, discount rates are higher, and exit scenarios are fuzzier. Nonetheless, we think it is important to remember that the valuation process is intended to determine the fair value of an asset as of the valuation date. Stated differently, it is the market clearing price, not a price target based upon an investment thesis.
FEATURE ARTICLE
Elon Musk on Fairness and Solvency Opinions
Also in This Issue
Updated Metrics for
Private Credit and Equity
Publicly Traded Private Credit
Venture Capital