PitchBook News - Rates, recovery, rationalization

Does this mean we've hit bottom and the only way could be up? We look at history to see how bad it could get.

The proportion of down rounds in Europe sat at 21% in 2023, the highest since 2014. However, the share has been higher, exceeding 25% in years prior.

What is also different this time is the shift in interest rate regimes globally. We believe ultimately, accounting for some lag between public and private asset class valuations, we should broadly see an inverse correlation between peak rates and trough valuations.

The wait-and-see approach adopted by central banks since the beginning of the year doesn't give full assurance the peak has been hit, but it provides some respite for more dovish expectations through 2024.

Outside of rates, we believe VC stakeholders will be looking for recovery and rationalization opportunities.

Interest rates will determine the extent of recovery this year amid the green shoots which indicate trough valuations. Lastly, lower valuations create opportunities in the market, often leading to rationalization.

Especially after a period of overinflated values, we believe cheaper assets are proving attractive for various investors seen by increased M&A exits in VC.

Fragmented sectors are therefore likely to consolidate, which could lead to more rational behavior by industry players amid more rational valuations in the market.

For more data and analysis, download our free 2023 Annual European VC Valuations Report.