How Market Volatility May Affect Private Company Liquidity

Learn what the impact of market volatility might have on private company liquidity. Explore what companies might expect in an uncertain market.

Volatile public markets may affect private company liquidity in a variety of ways. Find out what this might mean for private company shareholders.


According to recent research from Morgan Stanley at Work, equity compensation remains an effective strategy for employers to attract highly-mobile talent in today’s labor market. Yet the value of equity compensation may diminish if employees cannot sell it to make a profit. This is a common challenge private companies face.


One of the advantages of an initial public offering (IPO) from the perspective of private company employees is that it may provide them with the liquidity to sell their shares. However, during times of market volatility, many companies choose to delay their IPOs. That was certainly the case in 2022 when worldwide IPO volume dropped by over 50% year-over-year.1


In this type of environment, private company shareholders may turn to the secondary markets in search of liquidity. In fact, during the first half of 2022, secondary market transactions reached a high of $57 billion.2 Yet, despite delivering a source of liquidity, these deal volumes may present challenges for private companies. Here are some reasons why:


Company Valuations May Decline

While greater demand for private company shares may push up share prices in the short term, it may lead to fundraising challenges down the road. That’s because when private company shareholders sell their equity holdings, it may signal a lack of confidence in the company’s long-term growth prospects. And if existing shareholders are willing to take a discount on their shares—as many shareholders did in 20223—that signal may get louder. This, in turn, may result in lower valuations should these private companies decide to go public.


Liquidity Pressure May Build

During times of public market volatility, demand for liquidity may build as shareholders struggle to find buyers for their shares. Later-stage private companies may change their plans to go public and wait for more favorable market conditions. Any change to a company’s public offering schedule may lead shareholders to ask for partial liquidity to compensate for the change. In addition, equity holders with expiring options or high option exercise costs may look to their companies for liquidity support if public listing plans change.


Rising to the Challenge

To counteract the declining valuations that secondary market sales may trigger, while relieving pent-up liquidity pressure, private companies may want to introduce employee programs that allow for partial liquidity. By giving early shareholders an opportunity to realize some of the value of their equity, these controlled liquidity events—such as tender offers—may give companies an opportunity to reward current employees while minimizing dilution.

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