VC Funding Cools Off in Q1 22, Dropping 19%; How this Impacts the Private Equity Markets
Global venture volume is down ~20% from the prior quarter, which isn’t surprising considering how heated the environment was last year, and now with the tanking of the public markets, especially within the technology sector. Despite this pullback, we’re still well above Q1 2021, and all prior years, excluding the Covid period in 2020. See below:
Also not surprising, we’re seeing the majority of the pullback coming from the latest stage investors, a.k.a., crossover investors (asset/investment mgmt i.e. hedge funds) such as Tiger, Coatue, D1, who at one point (namely Tiger), were announcing a deal a day. To put that in perspective, most private equity firms (and in my personal experience) look at thousands of deals a year, and will only make 3-5 investments.
An interesting dynamic now exists with a convergence of tail and headwinds, where the result can only be speculated (I shall make an attempt here). On the tailwind side, U.S. VC funds raised a record $128.3 billion across 730 funds in 2021, a 47.5% year-over-year increase as compared with the previous record of $86.9 billion set in 2020. This committed capital needs to be deployed which should prop up valuations in high quality assets, especially in those earlier stage, which can grow and perform through the current/near-term downturn, in 3-5 years. However high interest rates will impact valuations for LBOs, as there’s no escaping that affect, vs. growth equity investments. On the headwind side, we have a heavily corrected public market, which trickles down into the private markets, especially for larger businesses and funds. The result, an increase in take privates by large private equity funds, to buy beaten-down high-growth SaaS companies at the bottom, ride their continued growth over the next 3-5 years, and take them public again in a bull market. This is evidenced by Thoma Bravo’s recent acquisitions of Sailpoint and Anaplan. Sailpoint at $6.9b, doing ~$540mm in run-rate revenue, growing 30%, is a 12x revenue multiple, yet at the current growth levels, isn’t too shabby. Anaplan, was purchase for $10.7b, a 16x run-rate revenue multiple. Ironically, if this trend continues, it will be a boon for such target market in anticipation of buyers paying a ~30% premium for the acquisition. There are a lot of such targets that are industry leaders, with sound business models, and growing rapidly that are down up to 80% from their 52-week highs.
It begs the question, will we see similar activity from other large PE firms that may be seeing better buys in the public vs. private markets?
Will we go into a sell-induced broader recession, due to fed rate increases, that lasts a few years, or can this be a short term economic manipulation to cool off inflation back to humane levels, with the fed just as easily cranking back the rate hikes in the coming quarters?
Only time will tell (insert popcorn eating meme).