PitchBook News - The future of encryption

Also: Climate tech investment cools but long-term tailwinds persist; Insurtech challenged by dropping valuations; US PE middle market has a slow start
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The Research Pitch
June 18, 2022
Presented by Cision Insights
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Recession watch: What are the key inputs in our recession prediction model? In case you missed it, our research last week on the new regime for US PE goes over the most important factors. Check it out.

LPs recalibrate: Continuing our series of research on the new macro environment, we've published insights into how capital allocators and institutional investors are thinking right now. Read it here.

Last call! On Wednesday, our analysts will host a free webinar on how AI, IoT and information security startups are capitalizing on innovation in database technology to propel their growth. Register here.
 
Emerging encryption algorithms promise to set new standards for cybersecurity
The bull market for cybersecurity produced an alphabet soup of software solutions defined primarily by highly valued vendors—XDR, MDR, EDR, SASE, and ASOC, among others (check our annual information security report to spell those out).

As capital markets cool off and award less credit to the flavor of the month, we believe it's time to focus on the timeless security technique of encryption.
 
Click to access our encryption ecosystem market map.

While the internet has relied on sturdy encryption standards since the 1990s, the proliferation of crippling ransomware warns that the backbone of cybersecurity needs reinforcement.

Standards development produced an emerging standard for passwordless authentication with FIDO2's WebAuthn protocol in 2019 and a post-quantum cryptography standard is due to be finalized in 2024.

Beyond these authoritative standards, academic research and startup innovation in privacy-enhanced computing is beginning to produce acquisitions of promising technology.

We believe that these developments are working toward standardization in the long term.

Our analyst note maps the categories and startups driving these new standards. Download it here: Hashing out the Future of Encryption Algorithms

Don't hesitate to reach out to discuss any of these topics further.
 
Best,

Brendan Burke
Senior Analyst,
Emerging Technology Research
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US PE middle market off to a lukewarm start
Following last year's historic dealmaking run, PE firms had a moderate start in Q1 2022 across the US middle market.

The middle market has faced a number of challenges including a turbulent global macroeconomic backdrop that's spanned raging inflation, the threat of higher interest rates, broken supply chains, and Russia's invasion of Ukraine.

We expect to see more deals close in the middle market going forward as valuations come down and as many sponsors seek out smaller investment opportunities in a volatile market.
 
Lower multiples could help spur middle-market dealmaking.

Additionally, middle-market companies could increasingly turn to PE firms as trusted partners and capital providers to support their operations and even accelerate their growth as they navigate inflationary pressures and tighter monetary policy.

Exit activity has faced headwinds driven by market volatility and falling prices, but middle-market exits may be less affected than the broader PE market because they are less reliant on public listings.

Fundraising remained healthy in the quarter, but there are signs of slowing for middle-market sponsors who face a challenging environment as they compete against large GPs for capital.

With incredible demand for re-ups, middle-market sponsors will have to be more innovative to hit fundraising targets or be forced to delay fund closings.

For additional analysis, click to download our free Q1 2022 US PE Middle Market Report.

Feel free to reach out with any questions or feedback, or if you would like to discuss the research.
 
Best,

Jinny Choi
Analyst, Private Equity
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Emerging Tech Research  
 
Climate tech investment, which slowed in Q1, could fall further due to volatility and declining valuations

But in the long term, a growing demand for energy independence in Europe—exacerbated by the war in Ukraine—is likely to accelerate VC activity, particularly in areas like hydrogen, solar, batteries, nuclear, and wind.

Elsewhere, the data shows increasing investment in the built environment category, which includes low-carbon cement, heating & cooling, and building efficiency.

Our premium research also highlights an emerging opportunity in mining tech, as startups work to reduce the carbon footprint of processes like lithium mining:
read a free preview
 
 
A challenging outlook for insurtech companies means VC funding is poised for a slowdown.

Insurtech companies have become largely seen as overvalued, and this sentiment is evident in our index of recently listed public insurtech companies—which was down 40% over the 12 months ending March 31.

And yet, opportunities remain for nimble, fast-moving startups to enter a fragmented market.

Our latest insurtech research dives into the emerging prospects in workers' compensation insurance and crypto insurance, while also offering our regular suite of charts and data:
read a free preview
 
 
Commentary  
Quantitative research analyst Andrew Akers weighs in on this week's decision by the US Federal Reserve to raise rates by 75 basis points, the biggest increase since 1994:

"The Fed's decision to raise the federal funds rate by 75 bps signaled a clear shift to a more aggressive policy stance that prioritizes bringing down inflation over supporting economic growth.

"While today's hike will garner most of the attention, the more important takeaway is the sharp increase in expectations for further tightening—both the Fed and markets see interest rates finishing the year around 3.5%.

"We think these developments have increased the probability of a deflationary recession occurring in the next 12-18 months that would likely cause private market valuations to decline further and slow dealmaking dramatically.

"On the bright side, the Fed's commitment to fighting inflation has decreased the tail risk of stagflation, which would be the worst economic environment for private markets."

 
Andrew Akers, CFA

Quantitative Research Analyst
 
In the News  
Our insights and data featured in the press:
  • Year-to-date, shares of VC-backed companies that recently went public are collectively down more than 50% from January. [Fortune]

  • SPACs as a category are doing just as bad as the formerly VC-backed public companies in this downturn, but worse since 2018. [Protocol]

  • Artificial-intelligence startup investors are turning their focus to accounting software as companies prepare for a potential economic slowdown. [WSJ]

  • How PE can ride out the rough patch. [CIO]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team.
 
ICYMI  
Highlights from our other recent research:

Market updates Thematic research Emerging Technology Research Coming next week (subject to change)
  • Real Assets Report
  • Did VC Fly Too Close to the Sun?
  • PE's New Opportunity in Supply Chain Tech
  • ETR: Agtech* (sneak peek!)
 
A message from Cision Insights  
What you don’t know can hurt your portfolio
Get total insight into the reputation and value of target acquisitions and portcos.

Today, brand reputations are shaped and reshaped every day by millions of voices around the world. For private equity firms like yours, understanding how those reputations impact your bottom line is critical to identifying risks and opportunities.

Cision’s global strategic communications platform makes it possible.

Leveraging deep expertise across industries, Cision Insights enables you to make sense of today’s media landscape—and make intelligent investment and management decisions that improve business outcomes.

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