First, some context: Trump’s assessment that his administration began with “two perfect months” has not been shared by the public markets. Liberation Day liberated $5.6 trillion dollars from the Dow and NASDAQ. Total public market losses since Inauguration Day exceed $11 trillion. (Not everyone agrees that the downturn is “major loser” Jerome Powell’s fault.)
What does this “Trump Bump” mean for institutional venture investors who’ve endured scarce exits since 2022?
The bad news.
The wealth effect is real. As Stephen Colbert quipped, “your 401, is not k.” And when your 401 isn’t k, you spend less: stock market downdrafts have a well-documented “wealth effect” which cause consumers to spend less.
The economy is still generally healthy as measured by GDP and employment levels. But since consumer spending accounts for 70% of GDP, the wealth effect could amplify a stock market correction into a full economic downturn. The immediate drop in consumer discretionary spending as the market started gyrating, suggests the wealth effect is already impacting consumer spending.
And tariffs could increase inflation and further reduce consumer spending, causing more people to do things like dyeing potatoes for Easter instead of exorbitantly-priced eggs.
And shocker – economic downturns aren’t good for VC. During the 2008–2009 financial crisis, early-stage deals saw a decline of 35% as M&A and IPOs dried up. Falling public equity values have historically constrained VC exits as public company acquirers become more conservative, and their acquisition currency (their equity) depreciates.
The denominator effect is real too. When public market values fall, the “denominator effect” means LPs are over-allocated to private markets, and slow their new VC and PE commitments.
And maybe the worst news is not about the stock market, but the bond market.
When global markets start wobbling, global investors typically stampede into US treasuries, driving down yields. Not this time.
Why? According to Bill Ackman, “We are in the process of destroying confidence in our country as a trading partner, as a place to do business, and as a market to invest capital.”
With $9 trillion of U.S. treasuries held by foreign investors, loss of confidence in the U.S. as a safe haven could greatly increase the cost of servicing our national debt. It has already started: yields are up by 75 basis points, making it more expensive for companies and consumers to borrow, and more expensive for the U.S. to service its debt.
But there is good news for the private markets, especially VC.
A private market downdraft will probably be smaller – and slower – than in the public market.
While public and private markets are correlated, private markets are usually more resilient because of their unique dynamics.
First, private markets focus on companies with above-market growth and margin prospects, which command a premium to public companies. This usually means that private valuations decline less than public valuations. One large secondary investor estimates that the decline in their private investments will be far smaller than the decline in their publicly-traded investments – perhaps only 60% as much. In other words, a public market decline of 20%, would result in a private market decline of only 12%.
Second, private valuations decline more slowly than public valuations. Unlike public markets, private investments don’t get marked-to-market every millisecond, so there may be substantial lag before a valuation is re-set. And VC firms don’t arithmetically apply public market discounts to their private holdings (nor should they).That’s why it typically takes 4–6-months before a public market downdraft is fully felt in the private market.
The better news: VC investor may have the best prospects of any private asset class.
Private equity is having a rough patch, highlighting VC’s structural advantages.
PE firms are sitting on a record 29,000 companies worth $3.6 trillion, half of which they have owned for five years or more. Perhaps more concerning: PE firms now have dramatically less money to invest. PE fundraising dropped by almost 25% last year. And the number of funds closed plummeted by more than 48% year over year. All of that has reduced the dry powder PE firms have on hand to the lowest level since 2008.
Since close to half of PE exits are one PE sponsor selling to another PE sponsor, that doesn’t bode well.
But VC is better positioned.
First, unlike dry powder in PE, VC dry powder is at a record high: over $300 billion. That bodes well for private companies’ ability to raise follow-on capital from VCs, preserving private company growth prospects, and making it more viable for one VC investor to cash out another.
Second, and most compelling of all, the volume of dry powder in the secondary market is also at a record high, driven by an influx of retail capital through new entrants and ‘40 Act funds.
Plus secondary deal volume surged by over 39% year over year in 2024 to a record $152B (significantly more than total IPO volume). All that deal volume and all that dry powder drove up pricing across every stage, including early-stage VC; late stage VC; and growth-stage VC.
The punchline: Public market dislocation will affect all investors, VC included. But VC investors have better prospects to survive, and to exit via secondaries, than any other asset class.
