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The Credit Pitch: We're excited to announce that we've launched a new weekly newsletter focused on leveraged loans, high-yield bonds, private credit, distressed debt, and more. To learn more and subscribe, click here.
Sneak peeks: Weekend readers can get early access to new research: our Greater China VC Report and exploring an emerging sustainable investing opportunity in Cultivated Protein.
Talking PE: On Wednesday, our US PE analysts will revisit their 2023 forecasts from December, covering exits, fund returns, take-private activity, and more. Register here.
VC Dealmaking Indicator: Venture investors at the late stage have their most favorable negotiating environment in the 13-year window we track. See our new data. |
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When selecting a third-party administrator, choose wisely
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As a private equity fund manager, you have a lot at stake. Multiple dynamics are continuously reshaping market conditions: increased regulations, growing investor demands and complicated macroeconomic forces.
When faced with these challenges, your full attention needs to be focused on fund performance. Demanding more than just the basics from an outsourced service provider isn’t a luxury – it's a necessity.
It’s time to raise the bar on third-party fund administration.
Find out how |
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Why favorable conditions abound for the US PE middle market
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In a typical year, the middle market—which we define as between $25 million and $1 billion in enterprise deal value—accounts for roughly 60% of all US PE buyout value.
But this is not a typical year.
Middle markets peaked earlier than the overall market, with many records set on the way up in 2019, and surprisingly, some of those records are within sight on the way down.
Middle market fundraising has a shot at taking out the record high of 2019 when $153.2 billion in middle market funds were closed. A total of $78.5 billion in funds have been closed so far this year with another six months to go.
We attribute this strength to a case of megafund fatigue, where returns have slowed and debt has become scarce to support big LBOs, forcing even these larger managers to reach down market to get deals done. Valuations are also more compelling in the sub-$1 billion space.
This week we released our quarterly US PE Middle Market Report, which digs into the core of the US PE ecosystem, covering everything from fundraising to fund performance to deal activity to exits. More key takeaways:
• Middle-market funds outperformed megafunds for three straight quarters and by 9.6 percentage points TTM heading into 2023, the widest gap since 2016. This was a sharp reversal from just nine months earlier when megafunds led by a similar margin.
• The middle market accounted for 75.6% of US PE buyouts. We can see this playing out across all buyout sub-strategies including add-ons, carveouts, and even take-privates where activity remains brisk but values are half the median size of a year ago.
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| If it holds, this would be the highest reading for a full year. |
• Last but not least, US PE middle market fundraising is well ahead of last year, up roughly 25%, in what may turn out to be a record year. LPs have taken a shine to smaller buyout funds buying smaller companies in hopes of finding more alpha in an otherwise lackluster return environment.
This is all relative of course, the exception being fundraising. Dealmaking in middle markets is still down dramatically from its late-2021 peak, just less so than the overall decline in PE buyout volumes.
The middle market took its lumps early in the correction process and has leveled off for six straight quarters, while the rest of the buyout market continues to push lower in search of a bottom.
Prior periods of outperformance by middle-market funds have lasted anywhere from one to three years, and we have closed in on the low end of that range. Already we are seeing evidence of megafunds narrowing the performance gap in Q1 2023.
However, our view is that short of a big move down in interest rates, conditions favor the middle market for the foreseeable future, and it will continue to enjoy its moment.
For more data and analysis, download our free US PE Middle Market Report.
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Enjoy the read!
Tim Clarke
Lead Analyst, Private Equity |
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The Changing Landscape of Capital Call Facilities
GPs often tout the benefits of capital call lines, a common bridge financing tool used by private capital funds.
But skeptics argue these lending facilities artificially inflate a fund's paper return—and a turn in the interest rate cycle, coupled with a pullback in bank lending, has negated some of these advantages.
Our analyst note covers how capital call lines impact fund performance, the costs and risks associated with these facilities, and how tighter credit conditions have altered their use: |
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Examining US Investments in China
Over the last two decades, US-based investors have played an active role in propelling the growth of the Chinese venture market.
But amid escalating US-China tensions, there's been a noticeable pullback in that activity.
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This trend may not lead to as significant a void as one might expect. Our analyst note unpacks the history of this market and the outlook going forward: |
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Will Instacart's IPO signal a change for foodtech fortunes?
The grocery-delivery app has drawn much attention to the sector and a strong public debut could indicate an improving outlook following quarters of decline.
According to our new Foodtech Report, Q2's deal count was up 13% on a quarterly basis but deal value was down roughly 14%: |
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As VC dollars flowing into digital health have slowed, startups focused on behavioral health and general telehealth have still attracted $100 million-plus rounds.
Elsewhere, healthcare IT companies have been helped by recent improvements in health systems' finances and capacity to invest.
Our healthcare team has two new releases this week; you can access free previews for both:
Digital Health Report
Healthcare IT Report
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Some events to add to your calendar:
Sept. 26: Nation-state-led cyberattacks have been leaving enterprise defenders struggling to find their footing. We'll speak with Citadel Control Services CEO Josh Knighton about how cutting-edge AI techniques can help the endpoint security market. Register here.
Oct. 4: We're hosting a conversation with co-founders from YC alumni Cascading AI, JustPaid.io, and AlphaWatch AI on how AI is changing fintech and financial services—and who the winners and losers will be. Register here.
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Tech analysts James Ulan and Derek Hernandez on key findings from Klaviyo's pre-IPO filing:
"Marketing tech company Klaviyo's upcoming IPO is further proof that the IPO market is open for high-quality companies.
"The listing reaffirms two things. First, fast-growth startups have better IPO prospects because they've grown into their valuations, making their investors more likely to push for an IPO. Second, investors want a credible path to profitability.
"Boston-based Klaviyo was valued at $9.5 billion in 2022, according to a PitchBook estimate, and is backed by investors including Shopify, Summit Partners, Accel, and Sands Capital. It has raised around $778.5 million in VC funding."
For more analysis of Klaviyo's financials, click here.
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Our insights and data featured in the press:
- Arm's successful IPO only adds to SoftBank's "firepower" when it comes to putting money back to work. [Reuters]
- The US PE middle market is "firing on three of four cylinders." [WSJ Pro]
- VC funding in digital health "hit a new low" in Q2 and a material uptick isn't imminent. [Forbes]
- Has Miami seen a durable increase in US VC market share? [Bloomberg Opinion]
- Sixty-two major North American sports teams, valued at $179.7 billion, have connections to PE. [Fortune]
- Why VCs are channeling their crypto investments into more real-world uses for blockchain technology. [FT]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team.
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More of our other recent research:
Market updates
Thematic research
Industry & tech research
Credit research
Coming next week (subject to change)
- Introducing our Pre-Seed Dataset
- Quantitative Perspectives: VC
- France Market Snapshot
- Insurtech Report
- Mobility Tech Report
- A Guide to Manager Scoring
- Seeing the Eyecare Future State
- Emerging Spaces Briefs: Post-Quantum Cryptography and Deepsea Mining
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Since yesterday, the PitchBook Platform added:
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30
VC valuations
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2582
People
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539
Companies
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35
Funds
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