PitchBook News - Why VC's well has run dry

Without money coming out of the system, there isn't anything to put back in. Dealmaking is slow because of exit outlooks but also because GPs have needed to pull back on capital calls.

New commitments to funds have hit a wall, too. The incentive to recommit to the VC market is more strained for returns than it was during the global financial crisis.

The lack of exits is, of course, a problem. It's easy to point at something happening right now. But the other major problem was the bloat VC assumed during the ZIRP era.

Companies stayed private, raising more and more capital. AUM ballooned when in less frenetic markets, exits may have been achieved. The number of new firms created was unprecedented, adding more financing opportunities and pouring more fuel on the fire.

Before the slowdown, these were appropriate market dynamics. Though now, they have left LPs more illiquid to VC than ever and unable to rebalance their portfolios adequately. Just 5% of the market NAV has been distributed over each of the past two years.

Private markets are slower to change than public markets because of the lengthy fundraising and financing lifecycles that investors and companies follow. Secondary private markets are increasingly common, though they don't satiate liquidity needs just yet.

A 50bps rate cut by the Fed was a step in the direction of easing pressure on VC, but the slow market over the past few years is unlikely to readjust to growth quickly.

Our Q3 PitchBook-NVCA Venture Monitor shows how the market has kept churning along sluggishly.

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• After falling by two-thirds from the 2021 peak, the decline in exits appears to be washed out. Through Q3, exit value has rebounded by 51% YoY from a very low base on flattish deal count. The pace of exits will need to accelerate to alleviate the 8-plus-year supply of US companies in the PE inventory.

• The improved trend comes ahead of two major events: the US presidential election and US Fed rate cuts. We looked at past episodes to see what impact they might have on future PE dealmaking. The results point to a post-election December "bump" and a deal market already primed by "stealth" rate cuts administered by lending markets.

• PE fundraising is tracking in line with 2023, which recorded $382 billion raised for the full year. However, the 12% decline in dry powder foreshadows a future decline in our fundraising data.

• Our preliminary estimate of one-year returns as of Q1 2024 is 9.5%. This is a setback from our final estimate of 10.6% for the one-year period ending Q4 2023 and compares to a one-year return of nearly 30% for the S&P 500 and 20% for the Russell 2000. On a 10-year basis, PE still leads all major asset classes but will need to find a new gear going forward to maintain that standing.

All in all, things are looking up for PE dealmakers in Q4 2024 and beyond:

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