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The Research Pitch |
November 11, 2023 
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Presented by Masterworks |
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Navigating NAV loans: Net-asset-value loans have emerged as a solution to help portfolio companies maintain liquidity through turbulent conditions. On Thursday, our panel will debate the benefits and drawbacks of NAV loans from both the GP and LP perspectives. Register here.
Crypto's challenge: Despite a continued slowdown in VC activity, the crypto industry continues to work toward enabling increased adoption of blockchain tech. Get more data and analysis in a preview of our new Crypto Report.
Featured credit research: Each week, we make select reports from our LCD team free to non-clients:
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A message from Masterworks
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Research shows a portfolio which includes just a 5% allocation to contemporary art has historically driven higher returns compared to a traditional portfolio of 60% large-cap stocks and 40% bonds.
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Investing involves risk and past performance is not indicative of future returns. See important Reg A disclosures and aggregate advisory performance masterworks.com/cd. |
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US VC valuations stay on a downward trend
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2023 has proven to be a formidable period for the US venture ecosystem.
Dealmaking and valuation metrics have
either plateaued or declined across nearly all stages, while the current investing climate remains the most investor-friendly it's been in nearly a decade.
The IPO landscape remains relatively frozen, with just 27 public exits totaling $22 billion in Q3. While some encouraging IPOs occurred, caution is still warranted, as exemplified by Instacart and Klaviyo going public at reduced valuations.
Median public listing valuations have hit a 10-year low, further signaling diminished investor enthusiasm. On the other hand, M&A deals witnessed an increase in median valuation, indicating acquirers' continued preference for well-established, high-performing companies.
Despite the hope of many startups that their existing financial runway will weather these challenging conditions, a significant proportion have been able to evade the market. 17% of all deals in Q3 were down rounds, the highest percentage in a decade.
Additionally, the erosion of value creation between rounds continues to pose a significant challenge for startups and their investors, which not only limits return potential but also complicates fundraising for fund managers.
As we've long discussed, the ongoing turbulence within the venture landscape is particularly concerning for nontraditional investors, who were the first to retreat from VC as the economic landscape shifted last year.
Many of these investors have remained on the sidelines, scaling down their involvement in the venture ecosystem. The absence of these investors raises concerns, given the substantial capital they injected into the VC ecosystem in recent years.
As the year progresses, Q4 is poised to present challenges for founders, investors, and other VC participants. The question remains whether the worst is behind us or if there are further challenges ahead.
Until a clearer picture emerges, get more data and analysis in our new
US VC Valuations Report.
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Deal math remains a struggle for PE and healthcare services
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PE deal activity in healthcare services continued to slide in Q3, down 29% quarter-over-quarter.
Zooming in on healthcare services, which accounts for around 10% of US PE deal volume, provides a case study of ailments in the broader PE middle market.
Although moderately (not entirely) insulated from consumer spending swings, healthcare has been hard hit on the cost side of the profit equation, and many platforms are heavily leveraged as a result of rapid inorganic growth strategies.
As a result, taking on additional debt to finance acquisitions is off the table for many platforms. The name of the game is incremental, cash-flow-funded growth, whether through de novos or very small tuck-ins.
Diving in deeper: Most major PPM categories are stagnant, as aging portfolio companies wait for more favorable exit opportunities. Investors are keenly interested in behavioral health, especially mental health, but deal flow has lagged due to a lack of attractive targets at the right price.
Even cardiovascular, a red-hot category earlier this year, saw only a single transaction in Q3.
Bright spots are few and far between. Numerous sponsors are looking for entry into medspa, with its consumer demand tailwinds, cash-pay business model, and small clinic footprints. A category that lends itself to de novo plays, medspa feels very "of the moment."
Clinical staffing—not on the acute physician side, which has seen a wave of bankruptcies and downgrades, but on the nursing, allied, and long-term care side—has been resilient. So has occupational health, as employers scramble to address accelerating healthcare cost inflation.
Quietly, sponsor interest has been building around group homes, home and community-based services, pediatric dentistry, and other Medicaid-heavy categories, but this is manifest in a trickle of deal flow, not a rush of activity: Only a subset of firms are willing to take on the work required to make a sophisticated Medicaid play.
Looking ahead, we foresee no sharp rebound in large platform activity. Instead, dealmaking will slowly accelerate as the Federal Reserve eases off interest rates, barring a recession scenario. In the meantime, it is difficult for buyers, sellers, and lenders to come together on deal math that works, given the rich entry and add-on multiples many platforms paid over the last few years.
Our new Healthcare Services Report provides state-of-the-market insight and a comprehensive category-level breakdown of trends that dealmakers need to navigate this challenging environment.
Download our Q3 Healthcare Services Report
This quarter, we also expanded our taxonomy to include five new categories: clinical trial sites, diagnostic laboratories, emergency medical transportation, imaging, and specialty pharmacy. We also added 27 sub-categories to provide clients with more powerful and precise data.
Our 2023 Healthcare Services Overview lays out the new taxonomy and introduces the key drivers, opportunities, and risks associated with each category.
Download our 2023 Healthcare Services Overview
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Best,
Rebecca Springer, PhD
Lead Analyst, Healthcare
Email | LinkedIn |
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Private capital's stellar performance metrics from 2021 are now a relic of the past.
Through Q1 2023, all but one asset class posted a one-year horizon IRR below their five- and 10-year averages.
Our Global Fund Performance Report has all our latest data and digs into the factors affecting performance and how they might shift future returns: |
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VC was the only private market asset class to see its quarterly returns dip into negative territory in Q2.
Meanwhile, PE, real estate, and funds-of-funds kept up strong returns, reversing the trend seen at the end of 2022.
Our Private Capital Indexes, now with data as of Q2 2023, break down performance across 20 private market asset classes and subcategories: |
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Despite a cooling economy, PE dealmaking in Germany increased in Q3 on a quarterly basis.
VC deal value has continued its slump, according to our Germany Market Snapshot—the latest in our Country Snapshot series.
While the German economy is expected to grow next year, high inflation and weak consumption continue to weigh on the financial markets, including IPOs: |
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Are VCs returning to agtech?
It's been a long dry spell for the vertical, but total deal value improved nearly 20% in the third quarter, according to our latest Agtech Report.
Median deal sizes and valuations are nearing record highs, with startups making leaps in areas such as biopesticides and agroforestry: |
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Information security analyst Brendan Burke weighs in on Palo Alto Networks' purchase of Talon Cyber Security for a reported $625 million:
"This acquisition highlights the recent wave of infosec M&A and shows the need for innovation in endpoint security.
"Talon's secure enterprise browser integrates multiple security controls, including data loss prevention, SaaS application monitoring, and zero-trust access control.
"The company was founded in 2021 by serial entrepreneurs: CEO Ofer Ben-Noon previously sold automotive security startup Argus Cyber Security for $420 million and CTO Ohad Bobrov previously sold mobile security startup Lacoon for $100 million.
"Talon was named 'Most Innovative Startup' at the 2022 RSA Conference.
"Browser security has been an area of rapid development as we last covered in our Q3 2022 report, with new approaches emerging from startups including Island, Seraphic, Surf, and Red Access.
"The acquisition gives network security incumbent Palo Alto Networks a better foothold in endpoint workstations after only acquiring Secdo in endpoint security previously. This move progresses the market leader toward a horizontally integrated security platform across all segments of our product taxonomy."
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Brendan Burke
Senior Emerging Technology Analyst
Information Security |
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Our insights and data featured in the press:
- Many crypto startups have pivoted to AI. [WSJ Pro]
- Venture activity continues to slow, and "there is no expectation that dealmaking for US VC will shift during Q4." [Insider]
- "Investors will be more prudent about deploying capital to space tech companies, and thus we can expect many startups to either be acquired or fail entirely." [Private Equity News]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team.
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More of our recent research (* - report preview):
Market updates
Thematic research
Industry & tech research
Credit research
Coming next week (subject to change)
- Quantitative Perspectives: Private Equity
- Global League Tables
- Gaming Report*
- Supply Chain Tech Report*
- Emerging Sustainable Investment Opportunity: Waste-to-Fuel
- Private Capital and European Football: Part II
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Since yesterday, the PitchBook Platform added:
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VC valuations
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