NEPC’s Josh Beers was quoted in a recent Chief Investment Officer article to discuss the reasons why private technology assets are still compelling investments after a challenging year for tech companies. View the article on CIO’s site here.
“Technology is in everything that we touch, whether that’s food, medicine or commercially. It’s penetrating a lot of these areas to help solve some really big real-world problems, and I think that means it’s here to stay,” said Joshua Beers, head of private equity at independent investment consulting firm NEPC, when prompted to give an outlook on private technology assets for 2023.
Despite its prevalence in so many sectors, 2022 was not kind to technology investors. According to Goldman Sachs’ December special issue regarding global macro research, the Goldman Sachs Non-Profitable Tech Index (a measure of public equities) lost more than 50% through 2022.
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Market participants in private markets have already seen valuations falter, and private technology assets are not immune to the valuation crunch seen in the technology sector in public markets. “I think we’re going to see [valuations depreciating] more holistically [in 2023],” Beers says.
So-called ‘unicorn’ companies, or private companies with valuations greater than $1 billion, fell 48.3% last year to 308 at the end of November 2022, compared to 596 at the end of 2021, according to Pitchbook data. “When you think about simple investment theory—buy low and sell high—we think that it’s starting to set up for an environment where that could happen,” Beers offers, noting that the drop in valuations could create buying opportunities.
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“The typical path for an exit of a technology company is an IPO,” Beers says. “We’ve come off a period in which IPOs have been fairly robust. Now that window is essentially closed, and I suspect it will be closed for some time.”
While Beers attributes the lack of activity in the IPO market to valuation concerns, Luiña says “not going public is more of a choice than it is the market forces upon them. In the late [1990s], venture companies were funded typically through Series A, Series B and Series C rounds. There was very little private growth equity capital available, so companies really needed to tap the public markets to continue their growth trajectory. A lot of the value creation and a lot of the growth in those companies happened within the public markets.”
Beers verifies that companies are not limited to simply going public to access financing options or exits, as was the case decades ago. “There’s been a growing trend of [general partner]-led secondaries-type transactions in the form of continuation funds,” he says. “Activity in the venture world will start to pick up, providing liquidity to [limited partners] and some longer funds.”