The slide in cryptocurrencies has captured a lot of the headlines, but the bigger story is the rapid normalisation of real yields, the impact on corporate credit spreads, and the markdown in private holdings that have opaque valuation methods.
Last year, investors were doubling down on their software bets: “The $284 billion in tech deals private equity investors closed in 2021 accounted for 25% of total buyout value and 31% of deal count during the year, comprising by far the largest share for any single sector”. Technology had become the industry’s dominant area of focus, according to Bain & Company. Software buyout multiplies had reached new highs too due to increased competition in the sector.
The software component of the S&P 500 has fallen 29.9% YTD, and 33.3% since the peak for software stocks reached on November 19th, 2021. But it is almost certain that the valuations of many private companies in technology have fallen a lot more. The YTD drop in the Refinitiv Venture Capital Index has extended its decline to 53.7%. This will be a closer approximation to the losses suffered by private equity firms in their ‘growth’ chasing companies.
Compared to 2018 and 2020, stock markets will not recover so quickly. The S&P 500 is down 21.8% since the peak on January 3rd this year and is still yet to find a bottom. The support for markets following the ‘dash for cash’ in March 2020 underlined the view that central banks were always prepared to backstop markets. If markets could survive a ‘black swan’ event like a global pandemic, then there really wasn’t anything else to fear. But the propensity of similar central bank intervention this time around has been drastically reduced because of the high inflation numbers.
