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The number of global venture capital deals plunged in the second quarter after several quarters of a plateau as investment in both Europe and Asia slowed during the quarter, Pitchbook said. Global exits were the lowest since the first quarter of 2018.
Activity in Europe and Asia slowed during the quarter, putting pressure on the overall figure. The value of completed deals has been stable for a few quarters now, well below the highs of a few years ago.
Without major investors (crossover investors, private equity firms and sovereign wealth funds) actively participating in ventures, the outsize deals that have pushed deal value to records cannot be executed, according to a first look at a Q2 report from Pitchbook.
Exit activity remains subdued and the $51 billion in global exit value was the second lowest since the first quarter of 2018. Public market opportunities are low and the more active antitrust investigation has also sidelined major acquisitions , according to Pitchbook. Global inflation and heightened geopolitical tensions in key risk markets have also put pressure on exits.
Slow fundraising in Europe and North America is putting pressure on global fundraising totals for this year. Fundraising in Asia, based on both number of funds and fund value, is roughly on par with 2022, although much lower than 2021. A poor exit market globally will continue to provide a poor market for general partners fundraising , as limited partners receive low benefits to recycle in the enterprise strategy.
US main takeaways
Pitchbook said deal activity in the US has remained flat in recent quarters and remains high above pre-2021 levels, despite the rapid decline from late 2021 and early 2022.
Pitchbook estimates show that both in the early stages and as the company grew, the number of deals increased in the second quarter, although deal value for both is still much lower than expected. What this tells us is that many of these deals are likely being used to increase cash runways with as little dilution as possible, rather than raising a full round in a declining market, Pitchbook said.
Exit value is on track to close the year at just over $20 billion, which would be the lowest value in the past decade at nearly $50 billion. Initial public offerings were not viable options for venture-backed companies this year, despite public markets posting positive returns this year.
Companies that have emerged under the mantra of growth at any cost still need time to restructure their business models in a way that public market investors are willing to pay a premium, such as a well-developed path to profitability.
Fundraising received a boost in the second quarter, with several major funds closing, but at $33 billion, the year is on track for the lowest fundraising total since 2017. More than 3,600 funds have now closed since the start of 2020, keeping the number of deals relatively high stays. a large number of funds remain active in the market. Many GPs have postponed new fundraising campaigns to 2024, because that year is seen as a likely rebound in returns.
Europe’s decline in VC deals
The value of European VC deals continued to decline in the second quarter of 2023 as the deal making environment remained sluggish. The number of deals fell from the first quarter, as fewer deals were closed during the current slump.
Longer due diligence processes, scarcer availability of capital, and financing path management are impacting deal activity in the VC ecosystem. Meanwhile, macroeconomic issues, including stubbornly high inflation, low economic growth and high interest rates, continue to dampen broader sentiment in Europe’s financial markets.
Exit activity in Europe stalled in the second quarter of 2023, with few venture-backed companies willing to seek liquidity in the face of adverse market conditions. With valuation uncertainty and volatility in public markets, startups and investors are delaying exit plans until there is more clarity. Major exits and public listings were rare in 2023, and this could continue into H2 2023, Pitchbook said.
Fundraising slowed in the first half of 2023, with capital raised and the number of closed funds falling from the pace set in 2022. recent years. In addition, limited partners will prioritize commitments for potentially lower-risk funds associated with established fund managers with a strong track record.
Overall, the Morningstar-Pitchbook US Unicorn Index for the first half of 2023 is expected to show a negative return this year. And Series C and D rounds are likely to see the most down rounds as these are the companies most hungry for capital.
Early stage valuations and deal size will continue to rise and reach new yearly highs, despite a slowdown in total deal value and number of deals.
Special purpose acquisitions, IPOs and mergers will continue to decline, while the number of liquidations will continue to increase in 2023. The value of venture growth deals will fall below $50 billion in the USUS VC megaround business will fall below 400 deals, marking a three-year low.
“The market for public listings remains non-existent, despite public markets generally being strong,
positive returns since the beginning of the year. Fundraising, too, has tracked an annual record for pledges with the lowest quarterly pledges in a decade. These were all relatively predictable and continuations of trends that shaped 2022,” Pitchbook said.
And US VC fundraising will fall between $120 billion and $130 billion by 2023.
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