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Placement agent primer: What roles can placement agents play in the fundraising process? How can they level the playing field in a competitive landscape? Our research note explains it all: read it here.
ESG regulation: To learn more about SFDR and who will be most affected by it, we're partnering with Proof on Thursday to examine this upcoming EU regulation for disclosing ESG metrics and performance. Register here. |
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Too many startups, not enough chairs when the music stops
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2021 was a year of excessive funding for startups.
Cheap money and the fear of missing out on outsized returns drove VCs to deploy capital into whatever companies they could. This dynamic dissolved as inflation elicited higher interest rates by the Federal Reserve, which shrank public market valuations and dampened growth expectations across the economy.
Due to the opaque nature of private markets, though, the current environment has created a puzzling disconnect. We have not seen a major pullback in US startup valuations, deal activity, or dry powder. And yet sentiment in the venture market has turned notably sour.
To clarify what is happening, we present a new metric that quantifies the supply and demand of capital between startups and VCs.
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| VC's bid-ask imbalance has grown massively. |
Startups in 2021 expanded operations and increased their demand for capital. This means that while deal activity has not slowed drastically, it does not support current capital demands.
We estimate that unfilled demand by US startups reached $42.8 billion in Q4 2022. Put another way, startups demanded more than twice as much capital as VCs supplied.
This bid-ask imbalance has been an issue across stages, but nowhere is it more overextended than at the later stage, with capital demand outpacing supply by 148.5%. That figure is 50.5% and 67.1% for the early and venture growth stages, respectively.
Startups are feeling this gap as deal terms shift in favor of investors, as evidenced by PitchBook's VC Dealmaking Indicator (updated monthly). This imbalance will right itself in the long term, but there is misery ahead for startups searching for a chair now that the music has stopped.
To find out more, download our analyst note: When Dry Powder Stays Dry
Please reach out with any questions or feedback.
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Looking ahead to private markets in 2027
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The growth of the private market industry has been a remarkable feat over the last decade-plus.
With nearly $11 trillion in closed-end fund assets under management at the end of 2021, the expansion has been unrelenting, driven by fundraising records and strong performance.
Then 2022 hit. Geopolitical conflict, inflation headwinds, and central bank hawkishness have brought the global economy to the brink of recession. Public market investors felt the brunt of shifting sentiment, with the traditional 60/40 portfolio suffering its worst calendar year in decades.
Yet in private markets, stormy economic waters have barely shifted the cargo. Fundraising remained strong in 2022 as 2021 distributions were recycled, and fund assets have seen only marginal markdowns, according to our latest Benchmarks.
However, as headwinds persist, the prospect of negative AUM expansion for the first time since the financial crisis is a very real possibility. Given the recent discussion of a sea change in the markets, our research attempts to answer the question, "What does the future hold for private capital?"
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| Forecasting private capital AUM over the next five years. |
In the report, we present a simple yet dynamic model to forecast growth in assets under management for the industry, providing three scenarios depending on where financial market performance takes us. Our base case calls for AUM to grow from $10.8 trillion in 2021 to $13 trillion by 2027, but not before a decline in 2022 (as more data comes in) and 2023.
Forecasting is a balancing act of art and science, though, so we present a range for the eventual AUM forecast using a "good case" and "bad case" set of inputs. In our bad case, economic headwinds persist, and private fund performance and fundraising suffer accordingly. The net result is AUM may barely move, reaching just $11.2 trillion.
Our good case presents a rosier picture, where growth picks up quickly, fund performance suffers little, and the wheels of fundraising keep churning, leading to an AUM estimate of $16.1 trillion by 2027.
Importantly, different asset classes will feel different impacts in each scenario, so we break out our estimates by the main private fund categories we track: private equity, venture capital, private debt, real estate, and real assets.
We dive into each asset class, the scenarios, and the forecast methodology in our analyst note: What the Future Holds for Private Capital
As always, please reach out if you have any questions or feedback.
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After a tremendous 2021, M&A appeared poised to keep up its frenzied pace last year.
But while it wasn't another record-breaking year, M&A activity held strong even as global markets ran off the rails. Mountains of dry powder, shifting strategies, and well-capitalized strategic investors propelled deal value above pre-pandemic levels.
Our 2022 Annual Global M&A Report breaks down last year's trends by region and sector and explores the forces likely to shape the market in the months to come:
- Median deal multiples declined to 8.8x from a 14-year high of 11.1x.
- Add-ons grew to a record 72% of buyout deals.
- North American acquirers accounted for 21% of all European M&A value.
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The high-flying leveraged loan asset class returned to earth in 2022, while private credit providers burst fully onto the lending landscape—stepping into the financing void.
Where do these crucial finance segments stand now, and how will each navigate an uncertain 2023?
Our team hosted a webinar this week to examine the trends that defined US leveraged loan and private credit markets in 2022 along with what lies ahead: watch it here
- Feb. 8: PE firms have become leading consolidators of Medicare Advantage-focused primary care practices, but the market is extremely competitive. We're hosting a fireside chat with senior strategists from Optum to discuss this market. Register here.
- Feb. 9: Save the date for our quarterly webinar covering all of the latest trends in US VC dealmaking, exits, fundraising, and more. Register here.
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Senior tech analyst Brendan Burke weighs in on McKinsey's recent acquisition of Israel-based AI & ML startup Iguazio:
"Machine learning operations (MLOps) consolidation is occurring rapidly, with four acquisitions in the past two weeks including this acquisition and HPE's acquisition of Pachyderm.
"Iguazio's acquisition came with a significant valuation markdown from $167.7 million in the company's Series B to $50 million, indicating that the company did not grow into its valuation set in 2020.
"The company offered a nearly complete end-to-end MLOps platform with critical capabilities for model optimization including a feature store and model repository, yet we tracked low headcount growth over the past three years.
"The AI lifecycle software market remains relatively small at $6.7 billion as of 2022 and faces a shortage of AI specialist customers as well as competition from hyperscalers."
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Brendan Burke
Senior Emerging Technology Analyst
AI & Machine Learning |
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Our insights and data featured in the press:
- Sustainable infrastructure is a large part of the future of the asset class. [Institutional Investor]
- Expect mega-funds to dominate PE fundraising in 2023—as they did in 2022. [Fortune]
- Funding for women's healthcare companies grew as a percentage of overall digital health funding in 2022. [TechCrunch+]
- Dozens of generative AI startups raised early-stage funding in the final months of 2022, even as investors pulled back across the rest of the tech market. [FT]
- "Is the crypto lending industry doomed? I don't think so." [American Banker]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team. |
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Highlights from our other recent research:
Market updates
Thematic research
Public comp sheets and valuation guides
Coming next week (subject to change)
- Global Fund Performance Report
- Global Markets Snapshot: January
- ETR: Information Security
- ETR: Agtech
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A message from Globalization Partners
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How global expansion can be the key to your startup’s success
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The opportunity to grow your startup and scale into new countries is a dream come true of any entrepreneur and business lead. Following a successful round of funding, you may want to quickly scale your workforce to meet your ambitious targets, enter new markets and keep up with customer demand. But where to start?
G-P’s e-book, “Global Hiring Guide for Startups,” covers it all – global recruitment strategies, cultural considerations, identifying global talent hubs, using tech to simplify global hiring and more.
With its #1 Global Employment Platform™, backed by years of experience and expertise in over 180 countries and counting, G-P can be your guide to finding, hiring, onboarding, and managing your global team, in days instead of months.
Download it now |
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Since yesterday, the PitchBook Platform added:
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21
VC valuations
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1613
People
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495
Companies
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9
Funds
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