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PitchBook News - Cash is king for LPs

Plus: Challenges for emerging managers, fundraising for fresh-faced firms, opportunities in generative AI & more
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The Weekend Pitch
July 2, 2023
Presented by Vint
(Jenna O'Malley/PitchBook News)
A limited partner at a public pension recently walked me through his private markets investment model. Despite having allocations to some of the top venture managers, he wasn't thrilled with the asset class's performance.

VC has not behaved at all as expected, he said. Funds were deployed too quickly. Valuations of portfolio companies ballooned to unrealistic levels. But his biggest grievance is that cash distributions from venture funds have been nowhere near as high as PE and growth equity funds.

Getting cash back has become so important that the pension plan decided not to recommit to several brand name firms who didn't provide enough liquidity from their older funds.

The pressure to send money to LPs is driving some VCs to sell portfolio company stakes on the secondary markets, but they're finding that buyers are interested only in the best assets. Meanwhile, less attractive companies are not generating much demand, even at big discounts.

This is the Weekend Pitch, and I'm Marina Temkin. You can reach me at marina.temkin@pitchbook.com or on Twitter @MTemkin.
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Trivia
The ecommerce vertical, once a darling in the VC space, has seen its deal value drop continuously over the past five quarters, according to PitchBook's Q1 2023 E-Commerce Report. Across 83 deals, how much deal value was generated in Q1 2023 within this vertical?

A) $12.7 billion
B) $19.4 billion
C) $3.4 billion
D) $8.9 billion

Find the answer at the bottom of The Weekend Pitch!
 

Unpacking the generative AI wave

(Ascannio/Shutterstock)
Microsoft's $10 billion investment into generative AI startup OpenAI turned heads, but according to PitchBook's Q1 2023 Artificial Intelligence & Machine Learning Report, when excluded, deal count and value continued its decline within the vertical.

But there are still many opportunities in generative AI. From startups developing AI-centric chips to companies creating the large language models needed to train AI, investors have plenty of areas to explore.
 

Fundraising challenges jeopardize VC's smaller markets

Emerging managers have played a key role in venture's growth in smaller markets: Over the past five years, they've accounted for 63.7% of funds raised by firms headquartered outside of major markets like the Bay Area, New York and Boston.

But if emerging managers continue to struggle to fundraise, it could mean the undoing of much of the progress made in smaller markets as deal activity shifts back to areas with more substantial bases of capital.
 

It's not easy being green

With a more limited track record of returns, emerging managers have always had more fundraising work cut out for them than their experienced peers. But in the past five quarters, PE and VC firms that have raised three funds or fewer have made up an even smaller proportion of capital commitments to private funds.

Our analyst note brings hard facts to an important and wide-ranging conversation in alternative investing. How hard is fundraising for fresh-faced firms, actually?
 

Quote/Unquote
PlayStation president and CEO Jim Ryan
(Alex Wong/Getty Images)
"I don't like it, but I don't view it as anticompetitive."

—Jim Ryan, the head of Sony's PlayStation, when asked what he thought about deals to prevent certain games from coming to rival platforms during the FTC's case to block Microsoft's acquisition of Activision-Blizzard.
 

Recommended Reads
The long-awaited return of the buffet. [The New York Times]

From Beyonce to BTS, the star power of popular music artists is helping to revive pandemic-hit countries. [The Guardian]

The advertising industry has no intention of letting AI ruin the party. [Bloomberg]
 

Stay tuned
Keep an eye out for these fresh insights and research reports coming out this week.
  • Analyst Note: PE Exit Timelines and the Impending Maturity Wall
  • Analyst Note: Anatomy of a Population Health Program
  • Analyst Note: The State of Neobanks
  • 2023 Sustainable Investment Report
  • June 2023 Global Markets Snapshot
  • Analyst Note: Decentralized Physical Infrastructure Networks
  • 2023 US Private Equity Outlook: H1 Follow-Up
  • Q2 2023 PitchBook NVCA Venture Monitor First Look
 

Trivia
Answer: C)

In Q1 2023, the ecommerce vertical generated $3.4 billion in deal value across 83 deals. Read more about those deals and trends in our Q1 2023 E-Commerce Report.

This edition of The Weekend Pitch was written by Marina Temkin, Samantha Steele, Emily Burleson and Jacob Robbins. It was edited by James Thorne and Laural Hobbes.

Were you forwarded The Weekend Pitch? Sign up at pitchbook.com/subscribe.
 
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