How the public market correction is affecting the late-stage private equity market

Matt Witheiler, Private Equity Principal and Sector Specialist
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The times they are a-changin’. The late-stage private equity market is digesting a public growth multiple collapse that took us from boom to bust in four months. But while valuations may be coming down in the private market as a result, the opportunity-creating trends of technology disrupting all parts of the economy and companies staying private longer remain in place.

A changed valuation environment

The recent inflated valuation environment has finally corrected in a number of areas. For example, consider the software-as-a-service (SaaS) sector of the public market which is now back to the multiples of 2019 (Figure 1). 

Figure 1
how the public market correction is affecting the late stage private equity market fig1

But how is this public market correction impacting the late-stage private world? We’ve seen prices in some of the most richly valued areas fall significantly, leaving valuations of some prominent private SaaS companies, for instance, looking quite different than they did just a few months ago.

The public market correction is also causing a slowdown in late-stage deal activity. Don’t get us wrong, activity levels remain near all-time highs, but things are tapering off. Looking at first-quarter industry data, venture capital activity as a whole dropped 19% quarter-over-quarter. The number of US$100M+ financings has also fallen each month since reaching a fever pitch in November of last year (Figure 2).

Figure 2
how the public market correction is affecting the late stage private equity market fig2

It’s worth noting there is a lag effect in data like this: Companies often wait a month or longer from signing a term sheet to ultimately taking capital in and announcing the raise. So, it is likely that much of the late-stage deal activity announced in the first quarter was actually struck at the end of last year. Our readthrough: The Q2 number could be even more depressed than the Q1 number. In our view, there will undoubtedly still be robust deal activity, just not at the frenzied level of 2021.

Bottom line on today’s private equity market

Amid today’s changing valuations and cooling deal activity, the new environment is also beginning to shift the behavior of investors. Many may be regretting getting caught up in the high-valuation craze of recent years and may now be pulling back from the market. 

But overall, we may actually be heading into a more normalized environment where private prices come down, allowing disciplined investors to identify companies at more favorable valuations with potentially less competition.


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