PitchBook News - PE chases the 'everything rally'

Also: Is the tide turning in VC dealmaking negotiations?; Evaluating Europe's VC dealmaking funnel; New market snapshots for Germany and Italy...
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The Research Pitch
June 15, 2024
Presented by RSM
PE Lending League Tables: Who are the top lenders in the PE ecosystem? We've updated our data through Q1. Check out the rankings.

VC Dealmaking Indicator: The negotiating environment in venture has been exceptionally investor-friendly of late. Is that tide finally turning? See our new data.

EMEA Snapshots: Our Market Snapshot series leverages a mix of public and private data to illustrate economic trends within countries across the continent. Read our reports for Germany and Italy.
 
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Strengthening cyber resilience in private equity
While private equity firms ramp up their investments in emerging technologies to improve operational performance, threat actors are leveraging similar tools to deploy increasingly sophisticated cyberattacks. Private equity firms cannot afford to be complacent about cybersecurity, especially with reported breaches reaching record highs.

Mitigating cybersecurity risk requires increasing cyber resilience at the fund and portfolio company level and in working with third-party vendors. The 2024 RSM US Cybersecurity Special Report provides a deep analysis of emerging cyberthreats and insights into cybersecurity trends, strategies and concerns shaping the marketplace for middle market businesses in key industries for private equity investment.

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PE middle markets chase the 'everything rally'
In Q1 2024, US PE middle market dealmaking eased from a burst of activity in Q4 2023 but still tracked flat to slightly ahead of the prior year.

A release of backlogged deals with less-than-stellar fundamentals likely accounted for the Q4 bump, as it coincided with a temporary collapse in deal multiples.

That all reversed in Q1 with trailing 12-month multiples on middle market buyouts pushing sharply higher, albeit on lower deal volume.

The snapback in multiples likely reflects more breathing room gained from lower borrowing costs, where spreads have compressed significantly. It also reflects an M&A recovery that has yet to broaden out.

PE firms are bringing their most attractive assets to the market for an M&A process and waiting on the rest.

A broadening out is what's needed to catalyze a strong uplift in deal and exit activity. In the "everything rally" of the last year, not everything has rallied equally as strong.

Private equity returned an estimated 8.4% in 2023, well below its historical average and also below the 26.3% posted by the S&P 500, although, as widely reported, that return has been highly concentrated in a small handful of heavy constituents. A better barometer is needed to appreciate just how concentrated returns have been and how narrowly valuations have risen.
 
A small-cap rally would do wonders for private markets.

To that end, our colleagues at Morningstar maintain a price to fair value ratio on the 800 US stocks they cover fundamentally. When those individual ratios are aggregated, it reveals a stark contrast between the fortunes of large and small public companies.

As of May 17, 2024, large-cap stocks were trading at a price/FV ratio of 1.04 as compared to a ratio for small-cap stocks of 0.83, representing a differential of 0.21. The gap has never been wider going back to 2010 outside of a brief period in May of 2023 (0.25), and it is well above the relative parity that existed for the 10 years ending in July of 2021 when the two markets diverged for good.

A rally in small-cap stocks would do wonders for the valuations of PE-backed and late-stage VC-backed companies in addition to providing more confidence to sellers looking to take their companies to market. It would also broaden out the "everything rally," which is what's needed to sustain public market strength and a continued M&A recovery.

While there is no guarantee that a catch-up rally in small-cap valuesβ€”and by extension private market valuesβ€”will commence any time soon, it looks fairly ripe by historic standards.

For more data and analysis, download our free US PE Middle Market Report.
 
Enjoy the read!

Tim Clarke
Lead Analyst, Private Equity
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Thematic Research  

Evaluating the Europe VC Dealmaking Funnel

Founders, operators, and investors are increasingly questioning what a typical startup's lifecycle looks like.

Using our data from the past decade, we've brought that funnel to life for Europe's VC ecosystem.
 
Click to see a larger version of Europe's VC funnel.

Key takeaways from our analysis:
  • Roughly one in three startups completes three or more VC rounds, while 8.2% secure five-plus.
  • The median time between rounds shrinks as round sizes increase.
  • Exit sizes have a limited impact on holding periods.
read the free research
 
 
Industry & Tech Research  
 
Despite a slow quarter for mobility tech deals, generative AI continues to push into the sector.

ChatGPT and others are changing voice controls and enabling more natural interactions with your vehicle.

Our Mobility Tech Report dives into that opportunity for our clients, while non-clients can access our data on top deals, investors, and more:
read a free preview
 
 
While challenges linger and VC activity has remained relatively static, opportunities are still sprouting in foodtech.

Our Foodtech Report takes a closer look at the outlook for and competitive landscape within autonomous service robots in the hospitality sector:
read a free preview
 
 
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June 20: If you're curious about how we've integrated credit data, indexes, and more into the PitchBook Platform, we'll discuss what credit market participants can expect for the remainder of the year and how to leverage our tools in your workflows. Register here.

June 26: What are the benefits of a larger, more diverse venture portfolio compared to a concentrated focus? Our live discussion with professionals from Screendoor and Pioneer Fund will center on seed-stage portfolio construction. Register here.
 
 
In the News  

Our insights and data featured in the press:
  • VCs have invested $4.9 billion across 199 cybersecurity deals this year, compared to $7 billion across 424 deals in all of 2023. [Bloomberg]

  • Digging into the rise of venture-focused secondaries funds. [WSJ Pro]

  • Why momentum is building within Europe's IPO pipeline. [WWD]

  • Crypto VC has come back to life, even if well behind the industry's peak in early 2022. [Fortune]
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)
  • Real Assets Report
  • Pharma Services Launch (new!)
  • E-Commerce Report*
  • Enterprise SaaS Report*
  • Insurtech Report*
  • EMEA Healthcare Market Snapshot
 

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