Why Are Public and Private Markets So Volatile?

TL;DR

Market volatility was being amplified by abundant SPAC capital, stricter PIPE negotiations, hedge funds managing short-term losses, and forced selling after shocks such as Archegos. Private startup valuations were also near observed highs, leading some investors to favor strengthening existing portfolio companies while favorable financing conditions remained available instead of aggressively pursuing new deals.

Transcript

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Key Insights

• SPAC issuance was exceptionally high in the first quarter, with about 110 billion dollars raised across roughly 300 deals. That total exceeded the capital raised during 2020, 2019, and 2018 combined, according to the figures discussed by the participants.
• PIPE financing had become substantially harder to secure. One market report cited about 50 PIPE opportunities in a single week, with an expectation that only five would close, whereas deals had previously been meaningfully oversubscribed and completed at much higher rates.
• Deal repricing was becoming common as investors demanded better terms. One transaction was reportedly renegotiated three times and ultimately priced 35 to 40 percent below its starting point, illustrating how rapidly bargaining power had shifted toward financing providers.
• SPAC sponsors face a two-year deadline to deploy their capital. Because the large first-quarter cohort was only about 90 days into that period, the participants expected more extreme behavior during the final six months before many vehicles approached expiration in November 2022.
• Year-to-date risk management prioritizes current annual performance because hedge-fund compensation depends on it. Codified rules can require progressively larger sales as positions decline, causing managers to exit investments even when a longer-term assessment might support holding them.
• Inception-to-date risk management allows investors without external limited partners to tolerate short-term volatility more easily. The discussion contrasts this approach with hedge funds that must control annual drawdowns, especially when inflation concerns, rising bond yields, and technology-sector rotation pressure portfolios.
• Private startup valuations were approximately double their levels from one year earlier. Hot pre-revenue seed companies were raising money at valuations of about 27 to 30 million dollars, compared with an earlier typical range of 5 to 10 million dollars.
• High private-market valuations can make portfolio financing more attractive than constant expansion into new investments. One proposed response was to make about 30 percent fewer new investments while helping existing companies raise capital and strengthen their balance sheets under favorable conditions.

Questions & Answers

Q: Why were SPAC deals becoming harder to complete?

SPAC deals were becoming harder to complete because PIPE investors had started demanding better terms, nearer-term operating evidence, and larger margins of safety. Instead of relying on 2025 projections, some investors wanted to evaluate 2023 numbers. Deals were repeatedly repriced, and sponsors increasingly faced pressure to contribute more of their own capital before transactions could close.

Q: How much SPAC capital was raised in the first quarter?

About 110 billion dollars was raised by SPACs during the first quarter, spread across roughly 300 deals according to the figures discussed. The participants said this exceeded the combined SPAC capital raised in 2020, 2019, and 2018. They viewed the volume as a sign that many sponsors would eventually compete for a limited pool of acceptable transactions.

Q: What happens when a SPAC approaches its investment deadline?

A SPAC generally has a two-year period to put its capital to work, based on the structure described in the discussion. As expiration approaches, sponsors may face stronger incentives to complete a transaction. The participants predicted especially unusual behavior during the final six months before the large first-quarter group reached its deadlines, particularly around November 2022.

Q: What is the difference between year-to-date and inception-to-date risk?

Year-to-date risk focuses on performance during the current year, which matters greatly to hedge funds whose compensation depends on annual results. Inception-to-date risk evaluates results across the entire life of an investment. Investors without external limited partners may have greater freedom to tolerate temporary declines because they are less constrained by short-term performance targets and redemption pressure.

Q: How can hedge-fund risk controls increase market volatility?

Hedge-fund risk controls can require managers to sell when a position falls by predetermined percentages. Larger declines may trigger additional sales or complete liquidation. When many funds follow similar rules during inflation concerns, rising bond yields, technology-sector rotation, or an external shock such as Archegos, simultaneous forced selling can magnify price movements and make otherwise rational long-term decisions impossible.

Q: How did Archegos affect the market discussion?

Archegos was presented as an external event that intensified existing market stress and highlighted the dangers associated with trading on margin. Its effects were discussed alongside funds already managing short-term volatility through strict year-to-date risk limits. The resulting pressure could force participants to reduce positions for risk-management reasons, thereby amplifying swings and broader discomfort across the market.

Q: How expensive were private startup seed rounds?

Hot pre-revenue seed deals were reaching valuations of roughly 27 to 30 million dollars. Earlier pre-revenue seed rounds had commonly carried valuations of about 5 to 10 million dollars, while companies with some revenue might reach 15 million dollars. These seed investments typically represented dilution of about 10 to 20 percent, implying approximately 3 to 6 million dollars of capital.

Q: How should investors respond to high private-market valuations?

One response is to reduce the pace of new investments and focus on existing portfolio companies. The proposed strategy was to review which companies needed funding, help them raise capital while valuations remained high, and strengthen their balance sheets. One participant considered making about 30 percent fewer new investments instead of competing aggressively for every expensive private-market opportunity.

Summary & Key Takeaways

• Public markets were shifting from easy financing toward greater scrutiny. Roughly 110 billion dollars was raised by SPACs in the first quarter, but PIPE investors had begun demanding lower prices, nearer-term projections, and margins of safety. Sponsors without sufficient capital could struggle to complete transactions before their two-year deadlines.

• Private startup financing remained unusually expensive. Hot pre-revenue seed deals were reaching valuations of roughly 27 to 30 million dollars, compared with a prior range of 5 to 10 million dollars. Because financing prices had approximately doubled within a year, investors considered reducing new investments and supporting existing portfolio companies instead.

• The broader discussion connected market leverage with public policy questions. Archegos illustrated how margin trading and forced risk reduction could amplify losses. The participants also examined government debt, infrastructure spending, possible tax increases, capital allocation, California wealth-tax concerns, economic freedom, equality, innovation, constitutional questions, and vaccines.