Preqin has published the Preqin Global Report 2024: Venture Capital, which reveals VC fundraising has remained weak throughout 2023; however, lower valuations for the asset class may prove a tailwind for this year’s vintage, the firm says.
Late-stage venture capital drags down fundraising
Venture capital has had a turbulent 2023, as highlighted by the results of the latest Preqin investor and fund manager surveys cited in the report. Of the 395 surveyed investors, the exit environment (75 per cent), asset valuations (55 per cent), and interest rates (45 per cent) were considered to be the main challenges that lie ahead. Raising capital has always been difficult for managers, and the recent investor caution is making it a particularly challenging time for fundraising teams, the firm says.
When compared to data for 2022 up to Q3, Preqin data shows venture capital fundraising slowed further in 2023. By the end of Q3 2023, there were 783 funds closed, raising USD85.7 billion in aggregate, representing drops of 9.0 per cent and 47.2 per cent, respectively. While the latest data available is from Q3, it looks like fundraising in 2023 will be at its lowest since 2015 according to Preqin analysts. Strategy-wise, expansion/late-stage funds declined the most, and all regions suffered a decline in fundraising, with North America seeing the biggest impact, both in terms of real value and percentage.
Looking at investor sentiment, in November 2022, 12 per cent of surveyed investors expected the asset class to perform better in the coming 12 months than in the past 12 months, compared with 38 per cent as of November 2023, over a three-fold increase. The main reasons for investing in the asset class remain and pricing is now more reasonable than in the past few years.
Decline in the number of exits recorded, but healthcare trade sales shine
Venture capital exits recorded for the first three quarters of 2023 reached 1,328, with an aggregate exit value of USD162.2 billion. This number represents a considerable drop from the 1,647 exits recorded in the first three quarters of 2022, a 19.4 per cent decrease from the previous year. Digging deeper, North America remains the dominant region, accounting for 68 per cent of aggregate exit value. What is more, trade sales in healthcare have been a major driver in venture capital exits this year, accounting for 48 per cent of aggregate exit value.
Cameron Joyce, SVP, Head of Private Equity, Research Insights, at Preqin says, “With venture capital fundraising having been weak throughout 2023, we expect managers to remain discerning with their deployments. The pessimistic outlook for future fundraising means that there will be limited capital available to start-up founders, which may drive higher levels of insolvency. That said, some managers will see better entry levels on valuations, which have decreased over the past two years. This will provide a positive tailwind for 2023 and 2024 vintages as they mature.”
Additional key findings from the Preqin Global Report 2024: Venture Capital include:
Deals: Venture capital deals have been impacted by lower fundraising levels in 2023, and the tougher fundraising environment has meant managers have been deploying less capital. There have been 14,363 deals so far in 2023, and aggregate deal value totalled USD220.7 billion. Compared to the year to Q3 2022, this represents a decrease of 19.3 per cent and 36.3 per cent, respectively. Early-stage deals fared better than late-stage deals, both in number of deals and in aggregate deal value.
Performance: Venture capital performance has taken a hit in 2023, with performance reaching -13 per cent for one-year horizon internal rate of returns (IRRs) to March 2023. No strategy was immune to the impact of valuations and the weaker exit environment. But it is true that near-term performance can be quite different to the overall return for a given vintage, the median net IRR for the 2021 vintage remains low at 6 per cent, but there still remains a long time for this vintage to play out.
Exit value: Trade sales currently, and historically, have accounted for the highest proportion of venture capital aggregate exit value, at 66 per cent. This comes as some recent IPOs, willing to test the exit environment in September 2023, were marked down after listing, which has not given investors and issuers confidence.
