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The Research Pitch |
May 11, 2024
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Presented by Citizens |
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Top VC investors: We've updated our latest PitchBook-NVCA Venture Monitor with Q1 league tables of the most active venture investors by stage. To see the rankings, download the free report.
Allocator's Atlas: On Wednesday, we're launching a new webinar series that's designed to help LPs navigate portfolio management. Our first discussion will dive into our latest data on private capital returns. Register here.
We're hiring! Our research team is hiring a senior industrials analyst who can be based in either Seattle, New York, or San Francisco. |
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2024 payment trends: How companies are evolving
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In its latest survey of 202 C-suite executives at mid-sized companies, Citizens found these businesses are embracing digitization, with 94% expecting a transition from checks to digital-only payments.
Read the report to learn how organizations are combating fraud and about the move to an all-digital future. |
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Toward $20 trillion in private capital AUM
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One could reasonably say the 2010s were an almost perfect decade for private markets.
Drawn in by strong fund performance, low interest rates, and a desire for alternative betas, institutional investors poured investment into the space and sent private capital AUM on a steep growth trajectory.
Over the 10 years ending 2022, private capital's exceptional expansion—2.5 times that of public market cap growth—led to global closed-end fund AUM increasing to $14.7 trillion. As we set our eyes on the future of private markets, we ask:
Will this impressive growth continue?
To answer that question, we have built a forecast model to project
the future for private capital over the next five years. With higher rates and muted distributions, we anticipate the market has an uphill battle to replicate the robust, 12.8% annual AUM growth since 2012.
Our base-case projections suggest more tempered annual growth of 4.9% through 2028, cumulating in an estimated $19.6 trillion of AUM. Under favorable macroeconomic conditions, we see AUM reaching $23.7 trillion with an annual growth of 8.3%, while our downside forecast sees AUM only expanding to $16.1 trillion.
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| Click to see a larger version of our AUM forecast. |
Across the various segments of private markets, we expect a wide dispersion of outcomes.
We estimate sustained growth across PE (cumulative AUM growth of +51.1%), private debt (+42.9%), and real assets (+26.8%), which have maintained relatively strong fundraising, performance, and investor appetite.
On the lower end of our forecasts, VC (+20.7%) and real estate (+10.3%) face more difficult paths with VC struggling under the weight of low exit activity and real estate commitments hitting a trough not seen since the GFC.
Our forecasts also include projections for secondaries and funds of funds (FoF) access points, which are going in opposite directions. Secondaries fund managers are well situated to benefit from the mismatch in capital demand and supply, particularly as PE and VC portfolio assets age amid the exit winter.
Compared to a decade prior, AUM in primary vehicles has grown 250% to $13.3 trillion in 2022, while secondaries AUM has grown 203% to $462.5 billion. With $200 billion in dry powder, secondaries GPs are in a position to purchase prime assets at attractive pricing from GPs and LPs in need of capital flexibility.
While we anticipate secondaries AUM to grow, FoF strategies are operating on a different script. The proliferation of evergreen vehicles has allowed investors to access private markets more easily via semiliquid offerings. In tandem, commitments to FoF have declined and we are forecasting AUM to stagnate at $1 trillion.
Read more about our AUM forecasts, methodology, and assumptions in our free research note:
Private Capital's Path to $20 Trillion
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Can PE add value in diabetes care?
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38.4 million people in the US—or 11.6% of the population—have diabetes.
These patients are disproportionately non-white and socioeconomically disadvantaged and collectively account for around one-quarter of total US healthcare spending.
However, investors historically considered diabetes a "lifestyle disease" and committed little capital to help treat it. More recently, major industry developments have brought diabetes to the forefront of investors' minds.
First, GLP-1 receptor agonist drugs, which were first approved for diabetes treatment in the mid-2000s, have exploded in popularity. While pharmaceutical companies pursue this lucrative new market, healthcare insurers are desperately seeking alternatives to help patients manage diabetes without relying on costly drugs.
Second, the US healthcare system is gradually transforming to focus more on what happens in between doctor's visits and procedures, including preventative care and holistic management of chronic conditions.
Enter the continuous glucose monitor. CGMs are devices that measure glucose in real-time, alerting patients to spikes and dips, informing treatment plans, and helping patients understand the effects of daily lifestyle choices on their condition.
In the mid-2010s, improvements in CGM accuracy and usability led to rapid adoption, and there is now robust clinical evidence to show that CGMs are a powerful tool in managing diabetes.
A handful of PE firms began investing in diabetes distribution companies, which process and fulfill prescription orders for diabetes equipment, in 2017, after Medicare began covering CGMs for some patients. In early 2023, Medicare dramatically increased coverage, more than doubling the Medicare CGM-eligible population, and a second wave of PE dealmaking is now imminent.
Diabetes distribution provides ample opportunities for PE to add value. Beyond the core function of stocking and shipping products, distributors are now educating physicians, handling prior authorization processes, engaging with patients, and working with insurers to track patient outcomes. Some are even providing lifestyle coaching and engaging with primary care physicians to coordinate patient care.
Investors in diabetes distribution must also navigate a complex landscape as new technologies and payer policies bring CGMs to broader patient populations. We unpack everything investors need to know in our Q1 Healthcare Services Report.
The diabetes distribution play illustrates how PE firms are being pushed to become increasingly sophisticated healthcare investors and to innovate to improve patient outcomes and reduce costs within the healthcare system.
Our report also takes stock of a sluggish deal environment in Q1—marred by antitrust and regulatory headwinds and a growing backlog of platforms needing exits—as well as the key value opportunities we see ahead for the sector.
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Best,
Rebecca Springer, Ph.D.
Lead Analyst, Healthcare
Email | LinkedIn |
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Though median VC valuations rose in Q1 across all stages, the gains were modest.
Flat and down rounds rose as a share of deals, hitting 27%, according to our new US VC Valuations Report.
Companies are exiting at low step-ups and occasionally taking haircuts—e.g., Reddit's IPO. In the secondary markets, shares are trading at a 28% discount on average: |
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Some private capital funds found firmer footing at the end of Q3 2023, but the story varied significantly by strategy, according to our Global Fund Performance Report.
Private equity led with a 10.4% one-year IRR, followed by private debt. Steady returns in infrastructure funds helped the real assets strategy.
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VC lagged with a -7.7% one-year IRR as the IPO market stayed quiet. Real estate was hurt by distress in the office and multifamily sectors: |
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Our Private Capital Indexes provide quarterly return benchmarks for the private markets, offering a high-level view of performance in terms of cash flows and changes to net asset values.
To assist allocators in risk modeling, our analysts provide adjusted returns to account for the inherent return smoothing in private capital strategies.
Volatility estimates and correlations to public markets are included for each fund strategy: |
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VC activity in gaming leveled out in Q1, with $1.3 billion invested across 153 deals.
Web3 gaming has seen renewed interest from investors, and startups developing new ways to present in-game advertising are also generating buzz.
Our new Gaming Report highlights the key trends and explores the emerging opportunities in game engines: |
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Two more webinars for you:
May 15: The European leveraged credit markets got off to a roaring start in Q1. Join our credit team as they discuss the changing dynamics among the leveraged loan, CLO, private credit, and high-yield bond markets. Register here.
May 21: After soaring during the pandemic, VC gaming investment has returned to earth. Our analyst Eric Bellomo is hosting a discussion on 2024 expectations, the segments driving innovation, and more. Register here.
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Our insights and data featured in the press:
- PE deals in healthcare services have trended downward since 2021. [Healthcare Dive]
- Climate tech investment has boomed with an $8.1 billion start to 2024. [TechCrunch]
- Why regional expansion for VC-backed startups in Southeast Asia is difficult. [Tech in Asia]
- While large LBO volume has dropped off in the last two years, PE growth equity investments have remained at a healthy level. [Reuters]
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)
- European VC Valuations Report
- Global League Tables
- Fintech M&A Overview
- Supply Chain Tech Report*
- Infrastructure SaaS Report*
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