PitchBook News - AI is a bandage, not VC's cure

Also: The Fed may be on hold, but PE got its rate cuts in H1; VC ranks low in 2023 private capital fund performance; Check out our new comp sheets...
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The Research Pitch
July 13, 2024
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Your views on ESG and more: We need your help! We're calling on allocators, asset managers, and anyone in the private funds ecosystem to take our 2024 Sustainable Investment Survey so we can quantify market sentiment.

Talking credit trends: Don't miss our quarterly US credit-focused webinar on Wednesday, where we'll dive deep into the challenges and opportunities within the leveraged loan and private credit markets. Register here.

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AI is buoying the VC market, but it's not a cure-all
From the surface, US VC activity has shown signs of bottoming out, but it is far too early to claim a rebound.

As long as inflation and high rates remain in the economy, VC will continue to be plagued by this prolonged slowdown.

Fundraising has particularly struggled. Several brand name funds have failed to reach their targets and raised significantly less than their last fund. Exit activity has not picked up meaningfully despite two unicorn IPOs this quarter, preventing LPs from receiving distributions.

In fact, the median DPI in fund vintages back to 2015 is under 1.0x, so these investors have not broken even yet. LPs are rightfully hesitant to add more capital to VC in this high-interest-rate environment. Consequently, fundraising is on track to reach the lowest level since 2019.

By branding themselves with the market's two favorite letters, AI-focused startups and funds have been seemingly immune to VC's troubles. Investors' fear of missing out on this technology has led to high valuations, deal sizes, and large AI-specific funds.
 
The US VC market has likely bottomed out.

Also thanks to AI, the market appears to be recovering, with quarterly deal value ascending to an eight-quarter high. However, 26% of Q2's VC deal value comes from just two AI companies: CoreWeave and xAI.

So far, AI is merely a bandage for dealmaking, not the cure.

VC will not fully recover until we see a meaningful decrease in interest rates—but it may find some relief for its symptoms in the meantime.

For more data and analysis, download our new PitchBook-NVCA Venture Monitor.
 
Best,

Emily Zheng
Senior Analyst, Venture Capital
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The Fed may be on hold, but PE got its rate cuts in H1
Earlier this week, we released the Q2 2024 edition of the US PE Breakdown. This is our quarterly workhorse and it's intended for everyone in the US PE ecosystem.

For more than two years now, the US PE industry has been churning through a historic reset in interest rates and trying to get to the other side in one piece.

This report provides the first evidence that the industry may be turning the corner nine months after the broader M&A market took a turn for the better itself. PE is more reliant on debt to transact, so it goes to reason that it has taken longer to join in.

There is still much more work to do: Deal value is down 36% from its 2021 highs and exit value is off by 60%, but a tentative climb has begun.

Here are other key takeaways from this quarter's report:

• Rate cuts from lenders, not the Fed, have been the big surprise of 2024 for PE participants.

• Much of this can be attributed to a full reopening of the bank-led syndicated loan market and renewed competition with private credit lenders.

• For B-minus borrowers, which describes many PE-backed companies, the spread on term B loans has contracted by 105 bps to the lowest spread in six years.

• PE had been holding back a budding M&A recovery, but now it is joining in. Through H1 2024, PE deal activity is tracking ahead of prior year by approximately 12%.

• This has arrested a 15-month decline in PE share of all M&A; PE had only known steady share gains in the eight years leading into that downturn.

• After fading in Q1, take-privates ripped in Q2, surging by four-fold to the best quarterly value in two years.

• PE fundraising continues to surprise on the upside at $155 billion YTD, although we view that metric as a lag indicator and fully expect a fade in the back half of 2024.

• Ironically, we could see fundraising turn down while lead indicators such as deal and exit activity gain steam concurrent with a second leg of interest rate cuts, only this time driven by the Fed.

For more analysis, download our US PE Breakdown.

As always, we welcome any feedback or observations that you have on the current dealmaking environment.
 
Enjoy the read!

Tim Clarke
Lead Analyst, Private Equity
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Benchmarks  

PitchBook Benchmarks

The data is in on the top private capital strategies of 2023, with private equity (+10.6%) and private debt (+9.2%) leading the way. Real estate (-4.2%) and venture capital (-3.0%) were in the red.

The newest PitchBook Benchmarks have just gone live, featuring IRR quantiles, pooled horizon returns, cash multiples, PMEs, and more, sliced by strategy, vintage year, and geography—including preliminary Q1 data:
  • Global
  • Venture capital
  • Private equity
  • Private debt
  • North America
  • Europe
  • Secondaries
  • Funds of funds
  • Real estate
  • Real assets
get our free benchmarks
 
 
Thematic Research  

Quantifying PE Investment in Healthcare Providers

The narrative around PE's involvement in the US healthcare system has taken on a life of its own.

But our approach to analyzing key issues always starts with data, which we focus on in our new research.
 

For example, we estimate the aggregate revenue of PE-backed healthcare providers in the US at just 3.3% of total US healthcare provider spending.

Additionally, PE investment in healthcare providers is neither new nor surging, and deal activity in hospitals and skilled nursing facilities is near zero.

Our note aims to lay out pertinent, objective information in order to contribute to fact-grounded discussion:
read the free research
 
 
Industry & Tech Research  
 
Despite a slowdown in VC dealmaking, defense tech remains a resilient market.

Support from government programs like the Defense Innovation Unit can offer a unique opportunity for startups.

Our new Vertical Snapshot highlights how VC-backed innovation can influence defense systems and provides an overview of industry dynamics, key players, and more:
read a free preview
 
 
Webinars & Events  

Plenty of events coming up:

July 24: Is European VC nearing a turning point? Our webinar, featuring JP Morgan managing director Folake Shasanya, will shed light on the trends and developments that should be on every investor's radar. Register here.

July 25: Our LP-focused Allocator's Atlas series will continue with ILPA's Brian Hoehn, addressing SEC private fund development rules and best practices involving NAV loans and continuation vehicles. Register here.

July 30: Why is there a growing appetite for food as medicine? We're hosting a live discussion with founders and investors on the investment landscape and factors driving sector momentum. Register here.
 
 
In the News  
 
Lead VC analyst Kyle Stanford on Yahoo Finance's Catalysts.

Our insights and data featured in the press:
  • Discussing VC market trends and the AI hype cycle. [Yahoo Finance]

  • "The venture market continues to be pressured and it's going to continue for a while." [Axios]

  • Small private credit firms are feeling the heat. [Bloomberg]

  • Why defense tech has weathered the VC storm better than most. [Fast Company]

  • The backlog of PE-backed healthcare providers continues to sit stagnant. [Axios]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team.
 
 
ICYMI  

More of our recent research (* - report preview):

Market updates
Thematic research
Industry & tech research
Credit research
Coming next week (subject to change)
  • US PE Outlook: Midyear Update
  • European PE Breakdown
  • European Venture Report
  • Climate Tech Funds Report
  • Enterprise SaaS M&A Review
  • Comp Sheets: Agtech, Gaming, Mobility Tech
 

Thanks for reading! Feel free to email us any time with feedback, questions, or tips!

Learn more about the PitchBook Institutional Research Group, meet our analysts, or access our research libraries for clients and non-clients.

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