After raising record levels of venture capital last year, the number of funds doing so this year looks set to plummet. In Q2, global VC fundraising was down year-on-year and the number of funds closed was the lowest seen in the past five years once the Covid-19 panic months of Q2 2020 are excluded, according to Preqin data.
- H1 fundraising is on track with $210bn raised globally in 2021 but number of funds has dropped off
- Recent entrants and crossover funds are retrenching and LPs face denominator effect
- Long-term allocation trend to VC remains positive once market stabilises
After raising record levels of venture capital last year, the number of funds doing so this year looks set to plummet.
In Q2, global VC fundraising was down year-on-year and the number of funds closed was the lowest seen in the past five years once the Covid-19 panic months of Q2 2020 are excluded, according to Preqin data.
With only 560 fund closes in H1, even if the same number return during the second half of the year, the 2022 total would be a staggering fall from last year’s peak of 1,790 funds closing.
A survey by Private Equity Wire during July found that 85% of respondents believe the industry is in a “more challenging” fundraising environment than a year earlier. The findings were explored in the latest Insight Report ‘Silicon Valley Blues: How VCs are adapting to a down market’.
Fundraising momentum has continued from 2021 into 2022 with major closes announced by Lightspeed Ventures, Index Ventures and Andreessen Horowitz, but H2 is likely to see a drop-off in activity, for two reasons
Firstly, new entrants or ‘crossover funds’ – hedge funds, institutions and corporates – drawn into late-stage venture in hope of cashing out quickly during the boom are retrenching.
“I think some of those investors will have a lot on their hands in terms of dealing with the issues in their portfolio,” says Dan Aylott, head of European private investments at Cambridge Associates, “and that’s where we’ll see the biggest contraction.”
Secondly, LP investors are pulling back on commitments as the value of their VC investments appears overweight, relative to a lower valued stock market, known as the denominator effect. Around $33 billion worth of stakes in private funds were sold during the first six months of the year, up from $19 billion in the same period in 2021, according to investment bank Jefferies, with almost half of these involving a first-time seller. Stakes in venture capital funds were sold at an average 71% of their most recent valuation.
A recent survey by Preqin found that a third of institutional investors plan to cut their exposure to VC over the coming 12 months, compared to only 13% last year. With VC valuations still somewhat elevated, the denominator effect will force more LPs to continue tweaking their allocations through 2022 and possibly until early 2023, say sources.
“The VC fundraising market hasn’t really been tested yet,” says Miguel Luina, head of global venture and growth equity at investment manager Hamilton Lane. “I think Q1 2023 is when you will see the ‘new normal’. Performance is still really strong, but a further slowdown is expected.”
However, given VC is typically only a small percentage of most LPs’ overall portfolio, wild swings in allocations are not expected and the long-term outlook remains optimistic.
Established fund managers may also seize the opportunity to “steal market share” from LPs still active, says Stephanie Choo, partner at Portage Ventures, who notes a pullback from family offices, many of whom can be more flexible in their allocations.
Large allocations of VC capital are evident, such as $190 billion Ontario Teachers’ Pension Plan Board announcement in April to more than double the size of its venture portfolio from 3% of net assets to 7-10% over the next five to 10 years.
“This will set a precedent,” says Ed Knight, president at VC firm Antler, “bigger pools of capital are coming in and longer-term allocations I think are going to remain very, very positive.”
Key Takeaawy – GPs | With fewer parties from in, and outside, the VC world in fundraising mode, there is an opportunity for established names to steal market share
