Insights into Private Equity Careers and Venture Capital Careers

Are we really in an investors market?

In the investing world, there is no more heated issue than whether economic conditions favor founders or investors. According to a fascinating research note out of private equity data provider Pitchbook, 2023 will be a year dominated by investors. Here’s their take.

Pitchbook’s Broad View

The following figure from Pitchbook depicts their take on the state of the venture capital world according to how favorable economic conditions are to early-stage (green), later-stage (blue), and venture growth stage (yellow) companies.

Fascinatingly, up until the middle of 2022, the venture capital universe was heavily in favor of the startup companies. According to Pitchbook, we’ve never seen a more startup friendly environment than what startup founders saw in the first half of 2022.

But all good things come to an end. And in this case, they changed fast. Since bottoming in the first half of 2022, the environment has shifted deeply in favor of investors. The Pitchbook authors’ report suggests that the current economic environment is so investor friendly that it would be difficult to get more investor friendly. Of the three reported types of venture capital investors and companies, current conditions are most favorable to later-stage investors, with the index value approaching 90. In second place is early-stage entities, with an index value. And rounding out the group is the venture capital growth stage group, with an index value of about 63.

A Second View – the Capital Demand to Supply Ratio

The next view is the capital demand to supply ratio. This offers an insight into the amount of money startup founders need and how much money investors have available to allocate to founders.

Interestingly, the situation for later stage entities (blue line) is enormous, with the demand to supply ratio at 3.2x. A 3.2x ratio is the highest on record – and by a large amount. Conditions started moving heavily in favor of companies supplying the capital in the latter half of 2022, and the rise has been incredibly large.

Also important is the rise in the capital demand to supply ratio for the other two types of entities – early-stage and venture capital stage. Both have seen their capital demand to supply ratios jump to historically high levels. Interestingly, though, for early-stage and venture growth stage companies, the ratio peaked (recently) at around 1.5x, well below the 3.2x for later-stage entities. And, perhaps more interestingly, the capital demand to supply ratio for early-stage and venture growth stage companies has started to decline in recent month, whereas it has continued to grow for later-stage companies. Hmm.

Summing Up

Overall, based upon recent research out of Pitchbook, early-stage companies have lost any form of upper hand they had with investors. We’re now in a world where investors can generally demand concessions from founders. This shift may continue to last throughout 2023 or could subside if interest rates lower and economic conditions improve.

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Every quarter, private equity data provider Pitchbook releases its accounting of the state of private equity. The most recent release for the first quarter of 2023 presents a surprisingly strong sector heading into what may turn out to be a very difficult economic year. Here’s a review.

The PE Picture by Quarter

The first look is private equity (PE) activity by quarter. Interestingly, activity was still quite strong through the first quarter of 2023. The estimated deal count reached about 2,200, down from the 2022 strength, but still above activity seen in the pre-pandemic era. On deal volume, deal volume reached a high of a little over $350 billion in the fourth quarter of 2021, and has generally trended down, although the 2023 Q1 result of about $250 billion (including estimated deal value) was surprisingly strong relative to its historical experience.

Deal Count by Type

The next view is the share of PE deal count by type. Overall, the PE growth/expansion sector accounted for around 25% of all PE activity in the first quarter of 2023, which was up from approximately 20% at the end of 2022. The Buyout/LBO sector cooled, dropping to around 15% of all activity from a 2022 take of around 20%. The largest sector, by far, was the Add-on sector, accounting for around 55% of all deals. Investors continued to focus on bets they had made previously.

Median PE Deal Value

The next view is the median PE deal value. Interestingly, the median PE deal value was off only slightly from the 2022 year-end value of $50 million. The $45.3 million Q1 2023 value was higher than most of its historical experience, although it does represent a second year of cooling after the extraordinarily high $70 million median value that we saw in 2021.

PE buyout disclosure rate by metric

The next view is the PE buyout disclosure rate by metric. Overall, the trend was down for all three metrics. For Enterprise value, the buyout disclosure rate dropped to 4.2%. For EV/rev. multiples, the buyout disclosure rate dropped to 2.5%. And for the EBITDA multiples, the buyout disclosure rate declined to 0.5%.

The PE Purchase Price Multiples Paid Versus Corporate View

The last view presented here is the PE purchase price multiples paid compared to corporate. Overall, though Q1, the PE multiple continued to drop from its 2020 peak of 12.2x, with the most recent value at 11.1x. This was still above the corporate multiple of 7.7x.

Summing Up

Overall, although the broader economy appears to be weakening with the onset of higher interest rates and high inflation, the PE sector continues to plow forward with healthy activity through the first quarter of 2023.

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