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PitchBook News - Zombie funds could rise again

Plus: The secondary market is surging, European VC is struggling, PE finds a way & more
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The Weekend Pitch
April 23, 2023
Presented by DealCloud, by Intapp
(Julia Midkiff/PitchBook News)
With exit totals in Q1 on the decline for funds globally, private markets are facing a new liquidity crisis. As more vehicles extend beyond their typical 10-year lifespan, and LPs wait longer for returns, so-called zombie funds could make a comeback.

Fund managers will still have means of generating liquidity for their LPs, chiefly through the secondaries market. But the blockage could be more severe for managers that find themselves overexposed to companies backed at peak valuations that they are now struggling to exit.

The situation echoes the global financial crisis of 2008, when private markets saw a glut of funds loaded with overvalued assets they couldn't sell. While some managers rode out the storm, many struggled.

As such, the period saw a proliferation of zombie funds: vehicles holding assets past their expected holding period with no way of liquidating these assets or raising a successor fund, effectively imprisoning capital in a non-performing fund while still collecting fees.

The concern is that a worsening of current market conditions could precipitate a new wave of zombie funds. But there is hope that slowing inflation and a break in the interest rate cycle will allow valuations to recover, or that today's more mature—and perhaps more sophisticated—secondaries market will provide the antidote.

This is the Weekend Pitch, and I'm Andrew Woodman. You can reach me at andrew.woodman@pitchbook.com or on Twitter @adwoodman.
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Trivia
During Q1 2023, VC deal value in Europe fell amid a challenging environment across the continent. Deal value generated was €11.8 billion (about $12.9 billion). How much of a decline was this from Q4 2022?

A) 10.8%
B) 47.1%
C) 19.2%
D) 32.1%


Find your answer at the bottom of The Weekend Pitch!
 

As exit window shrinks,
secondary market surges

(Golden Dayz/Shutterstock)
Global annual secondary transaction volume has nearly doubled since 2020, showcasing a growing market for manager-led deals and more individualized liquidity options. Allocators at the mercy of a depressed exit environment and a subsequent drop in capital distributions are seeking refuge in secondaries. With the maturation of this market comes heightened complexity.

At a high level, there are two types of secondary transactions: GP-led and LP-led. While the market started with the latter, the former have gobbled up a significant portion of business in recent years, growing to become at least half of total secondary transaction volume.

Read our analyst note on The Evolution of Private Market Secondaries to learn more about the key differences between these types of deals.
 

Easy times are over as
European VC struggles

(Andrii Yalanskyi/Shutterstock)
Times are tough for European venture capital as a harsher economic climate has dampened investor enthusiasm and startup growth prospects. Deal value and count both fell significantly in Q1, down 32.15% and 19.2%, respectively, quarter-over-quarter.

Although the outlook for European VC in 2023 is not as rosy as it has been in previous years, investors are still finding opportunities. Our Q1 2023 European Venture Report explores where investors are putting their money and how their strategies are impacted by this challenging environment.
 

European private equity
finds a way

(kirill_makarov/Shutterstock)
Despite the economic malaise affecting the world, European private equity had a pretty good start to the year. The total value of deals completed in the first quarter might be down compared to the same period last year, but the number of transactions is up. Coupled with the amount of capital raised so far, this year could outstrip 2022 for fundraising.

Our Q1 2023 European PE Breakdown demonstrates that when the market is tough, private equity will find a way. For instance, mega-deals aren't in vogue due to financing and other issues, so firms have adjusted their targets downwards to keep the deal flow going.
 

Quote/Unquote
(Ink Drop/Shutterstock)
"Headline inflation in the UK is once again heading in the right direction, yet the Bank of England is still a long way away from being able to feel comfortable that price pressures are under control. … The biggest mistake would be to claim victory prematurely."

—Hugh Gimber, a JP Morgan Asset Management strategist, said in an interview with The New York Times, commenting on the UK's double-digit inflation coming down slightly.
 

Recommended Reads
How much can Duolingo teach us? [The New Yorker]

A smart gun is finally here, but does anyone want it? [Bloomberg Businessweek]

Inside the secret list of websites that make AI like ChatGPT sound smart. [The Washington Post]
 

Stay tuned
Keep an eye out for these fresh insights and research reports coming out this week.
  • Q1 2023 Global M&A Report
  • Q1 2023 Enterprise Fintech Report
 

Trivia
Answer: D)

VC deal value in Europe fell 32.1% over last quarter. You can read more about that decline and trends in the Q1 2023 European Venture Report.

This edition of The Weekend Pitch was written by Andrew Woodman, Leah Hodgson, Jessica Hamlin, Jacob Robbins and David Stevenson. It was edited by James Thorne and Ron Prichard.

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