FinTech Magazine - Money20/20 Special FinTech Magazine - Money20/20 Special | Page 57

MORGAN STANLEY AT WORK
Private market liquidity can be beneficial Not going public but enabling employees to gain value from their stocks can result in gains all around , without the demands of going public . For example , if a group of two or three investors is looking to take a position and a group of 100 employees is ready to sell to them , it reduces the number of shareholders on the company ’ s cap table .
“ This can potentially be really beneficial to all parties ,” Adams states .
She points out that the benefit of gaining liquidity works on two levels for companies . Firstly , by letting them sell directly to an investor , they are allowing liquidity for employees without dilution . The process also provides an opportunity to clean up the cap table , the records of stock ownership , and reduce the number of actual shareholders .
One downside , however , is that the process may force companies and individual shareholders to come to terms with the delta in current valuations versus where they were a year ago . The gap in valuations from a company ’ s last fundraising round and what investors are willing to pay today is widening in private secondary markets .
“ Something that we think our clients are still coming to terms with is taking the hit on price now and knowing that , if this is a good business , it will outlast the market conditions that exist today ,” she says .
Investing in Private Companies From a venture capitalist perspective , the situation can be complicated . They want to maximise the valuations in their existing portfolio companies while entering new ones at what they deem as fair valuations . VCs carry out their own valuation models on what future valuations of certain companies will look like , generally built on revenue multiples , growth rates and unit economics . But , there is also an element of volatility in share prices , depending on competitive dynamics and the market ’ s climate .
Added to that is the current , ongoing economic downturn – though this will almost certainly selfcorrect at some point , with Swan explaining that “ the venture capital market is very cyclical ”.
“ Even compared to other financial markets , it has the highest highs and the lowest lows when it comes to valuations . For example , just over a year ago , secondary investors would pay a premium on the last round that a company raised .
“ Now , we ’ re in a different macro environment and talking about the discounts on the round an investor would pay . What ’ s interesting or unique is that it ’ s been so long since we ’ ve had one of these downturns . The market has been relatively stable for a decade . So there ’ s a whole generation of people operating in this market that have never experienced a recession . Also , 10 years ago , we didn ’ t have these massive
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