• Venture capital and private equity transactions have fallen dramatically, with North American value and volume down 60% and 35%, respectively. Global year-over-year figures were slightly lower as a result, reflecting both American activity comprising a large portion of the world total and a worldwide slowdown.
  • Financial sponsors are still sitting on over a trillion dollars in dry powder, but headwinds include a tougher regulatory environment, more expensive financing, and a widening gap between buyer and seller.
  • Analysts say the slowdown is due to higher interest rates pushing down valuations as well as a resilient economy, leading buyers to offer lower valuations while sellers are reluctant to sell at those valuations.
  • We expect continued decline in the second half, though likely a much less dramatic fall as we get further away from the gangbuster quarters of yesteryear.

2023 is the year of cautious optimism. While economic indicators look better than in 2022, higher rates and uncertainty are putting a damper on investment. Nowhere has that been felt more than in the private equity market, perhaps one of the most sensitive spaces to both sentiment and borrowing costs.

In a time of lower multiples, financial acquisitions have fallen dramatically.

VCPE 2023
Financial M&A Tumbles in H1 2023
Source: Bain

Some of the first half’s biggest deals include:

  • Toshiba’s take-private deal sponsored by Japan Industrial Partners, valued at over $16 billion.
  • Qualtrics International went private in a $12-billion transaction, sponsored by CPP and Silver Lake.
  • RedBird Capital (and emerging sports tycoon Ryan Reynolds) helped sponsor a 25% stake in the Alpine Formula One race team, at a nearly $1 billion valuation.
  • AI firms Adept, Anthropic, and Inflection AI all secured private funding at combined valuations of over $2 billion.

Take-Privates Dominate, VC Lags

Take-private deals have been some of the biggest in the space this year, while venture capital has sputtered in most industries. This makes sense in an economic environment defined by higher rates and lower risk tolerance.

Venture capital is more expensive than a couple years ago, both from a risk-reward standpoint and in the more tangible form of higher borrowing costs for leveraged deals. Take-private deals, like Toshiba’s, generally involve mature, proven companies. They also have transparent financial and strategic positions, with years of audited financial statements to bolster due diligence. Company boardrooms are more likely to accept such offers when public debt and equity markets are tougher places for fundraising.

As financial sponsors focus on more secure yields, VC has shifted toward strategic acquisitions. Many of the biggest venture capital deals so far this year have been inked by tech giants, with an eye on valuable IP, more efficient production or inorganic growth.

Know When to Hold ‘Em

The sag in venture activity mirrors a phenomenon we’ve also seen in the housing market this year: a decoupling between supply and demand.

Interest rates are high, putting downward pressure on demand. Just like would-be home buyers have to factor higher mortgage rates into their bidding prices, private equity firms are not willing to pay as much for a company when leveraged buyouts are more expensive.

At the same time, fewer people want to sell at those depressed prices. Home owners don’t want to say goodbye to the ultra-low mortgage rates they locked in during the era of QE, and they expect prices to continue pushing upward when rates come back down. Boardrooms are similarly reticent to sell, for much the same reason.

In its midyear report, an analyst at Bane explained that “nobody wants to be the chump that sold at the market bottom.” Multiples are down 14% from a year ago, and even lower than the glory days of 2021. Particularly when the economy looks increasingly resilient and many companies continue to perform well, owners see little reason to sell for far less than what they could have asked for a couple years ago.

Additionally, analysts and the bond market are pricing in a rate drop in the coming years, which creates an added incentive to wait out the high-rate interregnum.

AI: Venture Capital’s New Darling

Gone are the days of WeWork and Peloton dominating the private equity news cycle. Today, it’s all about generative AI (artificial intelligence) and its huge implications for tomorrow’s economy. We agree that the powerful technology has a more compelling value proposition than home workouts and coworking spaces, but like all private equity fads, some firms will deserve the hype while others flounder before hitting profitability.

That said, AI is likely the single largest M&A driver in the first half of the year, and analysts expect that to continue throughout 2023 and beyond. Generative artificial intelligence, in which computers generate new ideas and actions (like ChatGPT composing sonnets about your pet hamster), is the greatest leap in human industry since the internet.

From life sciences to screenplays, we will see a seismic reorganization of value, work, and wealth. That’s a recipe for massive M&A activity, and financial sponsors want to get ahead of that wave. Companies like Adept, Anthropic, and Inflection AI are raking in huge sums in early fundraising, both from strategic and financial sponsors.

It feels like ages ago that a company could attach “blockchain” to any project and double its valuation multiples (it was 2021). Today, AI is the buzzword that will send the VC funds flocking.

VDR’s Transform VC

In the rapidly changing world of venture capital, Virtual Data Rooms (VDRs) are emerging as an indispensable tool. These online repositories provide investment firms with a secure, efficient, and cost-effective way to manage vital information related to investments.

Features like two-step authentication, automated user provisioning, and collaboration tools ensure that confidential data remains protected. Beyond just safe storage, VDRs accelerate the due diligence process, enhancing the accuracy of portfolio assessment and enabling quicker decisions. Moreover, the ability to securely communicate with board members and supervise private equity deals remotely adds a layer of control and convenience.

The VDR market, already measured in the billions, is projected to continue growing at a double-digit pace in the years to come. It’s clear that these virtual environments are more than a passing trend; they are key component of tomorrow’s industry.

For more market insights, or to secure and streamline your own transaction, get in touch today.

New call-to-action
Download the NDA Review Checklist.