Allocator Solutions: Using PitchBook's portfolio forecasting tool, we've explored how LPs can optimize the pace of their commitments. In three simulated case studies, we model how allocators can navigate the denominator effect and more. Read it here.
New release: If you missed it, we launched full-time analyst coverage of the healthcare services industry last week with a 50-page report into PE investment strategies and dealmaking trends. Read it here. | | | | | |
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| Continued market challenges reflected in our quantitative recession model | | After 10+ years of easy money, loose credit policy, and consistent economic growth, macroeconomic conditions have started to quickly deteriorate in the US and globally. With this backdrop in mind, I am reminded of the famous quote from Warren Buffett: "Only when the tide goes out do you discover who's been swimming naked." Slowing economic growth, a sharp increase in short-term interest rates, and tightening credit and liquidity conditions will likely lead to a challenging period ahead for investors. The window for an economic soft landing following the current monetary tightening cycle has narrowed further as high inflation has been more stubborn than many expected, leading the Fed to be more aggressive with rate hikes relative to expectations earlier this year. Our quantitative recession model now predicts a 65% chance the US will enter a recession in the next 18 months.  | | Click to dive deeper into our quantitative recession model. | While inflation has started to slow, its path back to 2% remains highly uncertain as does the Fed's willingness to accept anything significantly above that target. Relative to past economic downturns, above-target inflation will force the Fed to be more conservative this time with respect to supporting weak growth and financial markets. This environment could lead to a particularly difficult period for many areas of private equity given its reliance on leverage, the declining credit quality of PE-backed companies in recent years, and optimistic valuations that have led buyout funds to report record returns in the second half of 2020 and 2021. With benchmark interest rates nearing 4% and credit spreads widening, the typical cost of new issue buyout debt financing has exploded from less than 5% to over 12% in less than 12 months, which will be a major hurdle for any new deals and refinancings. Rising interest rates have also led to increasing liquidity risks for PE-backed companies. Based on a starting leverage ratio of 6x EBITDA, we estimate that a buyout deal completed in 2021 at the average new issue spread has seen its interest coverage ratio fall from 3.5x to 2.5x. Further increases in benchmark interest rates combined with the potential for lower earnings in a recession could result in a material increase in defaults. Allocators face their own unique set of challenges related to private equity that will likely lead to a slowdown in fundraising efforts in the near term. Most notably, the sharp drawdown in public markets (equity and fixed income) and lagged private market fund reporting have caused relative allocations to all private market asset classes in institutional investor portfolios to increase. While it will depend heavily on the specific portfolio and target ranges, we believe that many investors are currently navigating around above-target allocations to private markets. For more analysis, download our free Quantitative Perspectives report: When the Tide Goes Out | | | | | | | |
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European VC valuations are continuing to show strength. But as the year progresses, those deal terms could yet change.
Our Q3 European VC Valuations Report highlights the key valuation trends across stages, sectors, and geographies: - The median late-stage valuation fell for the second consecutive quarter but still lands higher than expected.
- Down rounds have registered an uptick.
- Median acquisition exit valuation reached an all-time high.
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A trio of webinars coming next month: - Dec. 1—Curious about compensation at investment firms? We'll team up with J.Thelander Consulting to discuss trends in cash salaries, carried interest, and more for entry-level roles to managing general partners. Register here.
- Dec. 7—Our quantitative recession model now predicts a 65% chance the US will enter a recession in the next 18 months. We'll review the macroeconomic landscape and its potential impacts on PE. Register here.
- Dec. 14—We're hosting a live discussion on all things crypto, where you can hear several viewpoints on risk management, security flaws, regulation, and other trends amid this difficult period for the industry. Register here.
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Our insights and data featured in the press: - "Micro funds are the lifeblood of venture." [TechCrunch+]
- The investors who once buoyed America's e-scooter and bike-share companies are moving their capital to a new hub. [Axios Pro]
- European VC valuations remain on track—for now. [Tech.eu]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team. | | | | | |
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Highlights from our other recent research:
Market updates
Thematic research
Industry and Technology Research
Coming next week (subject to change) - Global Private Market Fundraising Report
- Global Markets Snapshot: November
- Agtech Comp Sheet and Valuation Guide
- Emerging Tech Indicator
- ETR: Retail Fintech (Launch)
- ETR: AI & Machine Learning
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| | Since yesterday, the PitchBook Platform added: | | 303 Deals | 1617 People | 514 Companies | 4 Funds | | | | | | |
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