Some Thoughts on the 2022 Private Equity/Venture Capital Outlook

March 29, 2022

Private equity data provider PitchBook is out with an interesting take on things private equity and venture capital professional have in the back of their minds as they invest in 2022. Here’s their take.

The Tight Labor Market is a Problem but Also Perhaps a Boon

The American labor market is tight, quite tight. The difference between the percentage of employees quitting and the percentage of employees being laid off is floating near its highest level ever. Employees have some power in their negotiation over wages.

Source: PitchBook

The Industry Detail of Quits Shows Surprising Differences

The labor market is hot, but that doesn’t mean everyone in every industry is calling it quits for greener pastures. Some industries still have very low quit rates, including Financial activities at 1.4%, Mining and logging at 1.9%, and Information at 2.0%. It’s worth noting that Financial activities and Mining and logging tend to see consistent and strong venture capital investing. Hmm.

On the other end, employees are quitting their jobs at historic rates in Leisure and hospitality (5.8%), Trade, transportation, and utilities (3.6%), and Professional and business services (3.6%).

Source: PitchBook

New Business Formations are Booming

The pandemic changed the face of business – at least for a while. One area where the effect of the pandemic and its aftermath shows up most clearly is in high propensity business formations. The pandemic led to a jump in new business formations, and it has yet to tamper down. Apparently American workers enjoy being their own boss. For private equity and venture capital investors, the rise in the pool of high propensity businesses represents a substantial increase in the pool of early-stage targets.

Source: PitchBook

The Wider Pool of Potential Business Targets Leads to More Financing Activity

With the number of new businesses exploding, it likely comes as no surprise that financing activity for these new businesses is high. The number of first financings among venture capitalists is floating at its all-time high, and there’s no evidence yet of slowing down. The new pool of businesses has attracted significant interest from investors.

Source: PitchBook

Median Deal Size is Notably Higher

Going along with the hot labor market, higher business formation and financings, median venture capital deal size has sharply in recent quarters. For the late-stage venture capital funds, median deal size has risen to more than $16 million, while early-stage venture capital funds have seen their median deal size rise to around $10 million. Interestingly, the median deal size for the smaller deals – angel investments – has not shown the same type of jump as late-state, early-stage, and seed venture capital investments.

Source: PitchBook

The Influence of Venture Capital Expands Beyond the Typical Areas

One of the most surprising looks at the current state of venture capital and private equity is the top 10 states to see an increase in venture capital investments, as measured by the percentage change in investments from 2 years prior to the pandemic to 2 years after the pandemic.

On top is Vermont, up 442%. Other states in the top 5 include Montana (up 326%), Iowa (up 290%), Idaho (up 249%), and Wyoming (up 248%).

Source: PitchBook

Summing Up

Overall, the 2022 outlook is clouded by many factors, including a tight labor market, rising interest rates, the expansion in the number of potential early-stage targets, incredibly high median deal size, and the expansion in the geographic makeup of venture capital investments. Time will tell what these and other issues will mean for the 2022 venture capital and private equity investment activity.

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