It’s been a rough start to the year, as venture capital funding hit a three-year low in the first quarter, while multiple bank collapses spread fears about the health of the financial sector. But private equity held up “better than expected,” says Tim Clarke, a senior private equity analyst for data provider PitchBook. The worry is, it could be downhill from here for the rest of the year.
“In my mind, there was a stress test, [and] PE passed it almost on every front, including fundraising, including deployment, which stabilized, and it also did five really big deals around that bank failure,” Clarke told me yesterday.
Per a new PitchBook report, though deal count dropped 9.3% (with over 2,100 deals), deal value rose 11.4%. Those numbers are, as the analysts write, “well above the pre-COVID-19 averages of roughly 1,400 deals and $180 billion in deal value,” but the trend is “still flat to down, and we have yet to make a definitive bottom.”
Perhaps ironically, Clarke believes the Silicon Valley Bank collapse (and the other bank troubles this past quarter) may have actually helped take some risk off the table for private equity for the rest of the year. Following the bank runs, “the entire shape of the [interest rate hike] expectations changed and people went from thinking about two or three more hikes to maybe one and done,” he notes. “So it actually helped the interest rate backdrop, which was the biggest threat” to PE.
However, exits—when private equity investors cash in on their investment and return those funds to their limited partners—continue to fall as the IPO window remains shut and many private equity firms are hesitant to sell companies at low valuations. Per the PitchBook report, U.S. PE exit count and value both declined for the third consecutive quarter in Q1.
“The biggest worry is…you're way down on exits,” says Clarke, and every quarter “is another quarter of very little cash flow coming back [to LPs].” He believes the industry “has to find a third avenue for creating liquidity—I mean, you either bring a company public, or you sell it to a larger player.” Clarke points out that public PE firms are talking about other strategies on their earnings calls, including the secondary market.
But Clarke says that the gap between net buying versus selling in PE has widened. “Eventually that feeds into fundraising and that feeds into performance if you don't solve this. The risk is that this is the best quarter of the year, and fundraising starts stepping down from this point,” Clarke warns.
In other words, if PE firms can’t exit more of their investments and return cash back to their investors, who can then feed it back into the system, “they don't have a lot of time before...that fundraising starts to shut down like it did on the venture capital side.”
So far in 2023, 73 funds raised $66.8 billion in capital through the end of March according to PitchBook. Clarke notes it was surprisingly “right in line—slightly above" Q1 of last year.
Overall, Clarke wagers that 2023 is shaping up to be a “subdued” year for fundraising, and likely a down year for dealmaking overall compared to 2022. But given how rocky the year has been so far in the private markets, “subdued” doesn't sound so bad.
Taylor Swift does good due diligence, apparently: While lots of top VC firms were fooled by Sam Bankman-Fried and his crypto exchange FTX, apparently Taylor Swift was doing her due diligence for a potential celebrity sponsorship deal and asked whether FTX was selling unregistered securities before deciding to pass, per the attorney who’s heading up a class-action lawsuit against FTX and its celebrity spokespeople. I can’t imagine writing this sentence ever again, but if only VCs were as wary as Taylor Swift...
See you tomorrow,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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