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Quant talk: On Wednesday, our analysts will assess the current macroeconomic landscape—including an update to our model that now predicts a 65% chance the US will enter a recession in the next 18 months—and what it means for PE. Register here.
State of the markets: Our latest Global Markets Snapshot breaks down a month of trends for the equity, debt, and commodities markets across a range of indexes and sectors. Read it here.
Sneak peek: We'll give our new Supply Chain Tech Report a wide release on Monday, but you can get an early preview of the client-only research here. | | | | | |
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| Denominator problems meet Allocator Solutions | | As we approach the end of 2022, many allocators are heads down in their portfolio reviews and 2023 budget planning. If you are an allocator with a sizeable allocation to private market funds, you may be scratching your head about what to do about the so-called "denominator effect." The phenomenon occurs when slow-to-adjust valuations in the private market allocation of an investor's portfolio are compared against falling returns in the rest of the portfolio, namely from sinking public stocks and bonds. For some allocators, what may have been an underallocation to private equity at the start of the year has turned into an overallocation, with many public stock indices down 20% or more so far in 2022 and private fund asset values not coming down much from their run-ups in 2021. Determining how one should respond, whether it be re-evaluating future commitment amounts or selling off LP interests in the secondary market, is a discussion many allocators are having. In our latest research, we simulate a hypothetical LP experience using historical data to provide context for allocators that are evaluating their commitment schedules and cash flow expectations for their private fund portfolios. To do so, we leverage our proprietary cash flow and commitment pacing models available within our new Portfolio Forecasting tool in the PitchBook Platform. Assuming a 20% allocation with a target range of +/- 2.5% within a 60/40 portfolio, our analysis shows that a steady hand should be the default when allocations get out of whack. Simulations of a mature PE portfolio entering the global financial crisis suggest that skipping out on a year of commitments due to the denominator effect was likely to result in an overshoot to the downside of the target allocation range once the crisis period ends and the public market assets rebound. The chart below simulates portfolios with skipped commitments due to the denominator effect and the impact on the allocation:  | | Big moves to the commitment pace led to bouncing around. |
Alternatively, incrementally adjusting the commitment schedule using cash flow forecasting allows an allocator to keep a tighter fluctuation in the allocation relative to the target range.
This chart simulates portfolios with dynamic commitment pacing using cash flow forecasts and the impact on the allocation:
 | | The results changed after leveraging cash flow forecasts. | Our analysis suggests that, for an allocator with flexibility and a long-term horizon, maintaining a steady course on planned commitments is the optimal route, with adjustments more incremental than wholesale. Of course, every allocator's portfolio and goals are different, so any scenario analysis like the ones created for this report should be taken with a grain of salt. Fortunately, our new Portfolio Forecasting tool in the PitchBook Platform provides customizability for an allocator's unique private fund portfolio. If you are interested in learning more about the models used in this analysis, please reach out to your account manager if you are a PitchBook client or info@pitchbook.com if you're not a client. For more data and analysis, click to download our free research: Allocator Solutions: Taking the "Demons" Out of the "Denominator Effect" As always, don’t hesitate to send over any questions or feedback. | | | | | | | | | How to better understand VC dynamics with a new stage: Venture Growth | | The venture market has grown to a scale that was likely unimaginable a decade ago. And while doused with hyperbole, that statement is likely true for some around the industry. In 2021, more than $700 billion was invested in startups worldwide. At the end of the global financial crisis, annual investment had fallen below $40 billion. The traditional risk profile of venture has also widened, allowing investors with less risky strategies to put capital to work in VC. The lengthening of the venture lifecycle has generated a wide variation in the risks associated with the late stage, which we've defined by categorizing Series C+ deals into the same bucket. But late-stage companies can be at very different phases of development, either observably or implied. Our research showed the proportion of companies going out of business after a Series F round, for example, was much lower than Series C companies, yet both were categorized in the same stage.  | | Click to dive deeper into our new late-stage methodology. | This created challenges for analysis. The highest-valued companies like Stripe and Bytedance were in a much different business situation than those around the median, which stood at $98 million in 2021. The top decile valuation of the late stage was $130.1 million in 2009; last year that ballooned to $1.4 billion. To account for these changes, we're introducing a methodology for a new VC stage: Venture Growth. This methodology creates a stage that encompasses the latest deals in the venture market, sitting on top of our late stage. It also creates an area of the venture market that shows a different level of risk; more crossover investment occurs in this stage, and the higher valuations and deal sizes coincide with lower failure rates. The venture growth dataset contains just over 4% of deal count on a yearly basis, but those deals account for more than 20% of deal value. Venture growth will be incorporated into our VC reports and analyst research moving forward. It will be also included as a separate stage of VC within the broader suite of PitchBook products in the future. Click to download the free research: Introducing Venture Growth As always, please reach out with any questions or feedback. | | | | | | | |
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Raising private capital became more difficult in Q3, as aggregate fundraising was down 7.7% in the 12 months leading up to Sept. 30.
Only funds focused on VC and real assets managed to surpass year-ago levels.
But as some GPs (particularly emerging firms) get nervous, institutional investors have gained leverage in discussions around fund terms, DEI mandates, and ESG data.
Our Q3 Global Private Markets Fundraising Report explains how each strategy survived—or thrived: | | | | | |
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Generative AI is all the rage.
The hype around text-to-image AI models helped draw rapid VC investment to the space during Q3. But this did not stop activity from falling for the overall AI and machine learning vertical, where deal value declined 46.7% quarter-over-quarter.
Our latest Artificial Intelligence & Machine Learning Report tracks 68 product categories, and only 20 are on pace to grow in VC funding in 2022—led by intelligent robotics, supply chain optimization, and conversational AI.
The report maps out the market and notes emerging opportunities, startups to watch, and much more: | | | | | | Retail fintech recorded unprecedented growth and expansion during the COVID-19 pandemic.
And while deal activity has declined greatly amid macro headwinds, many investment opportunities remain.
In our inaugural Retail Fintech Report—the newest addition to our Emerging Tech Research coverage—we map out the vertical's key segments and VC dealmaking trends.
We also highlight developing areas of interest, including advances in underwriting technology, the rise of embedded finance, and the continued proliferation of digital payments and banks: | | | | | | Our Emerging Tech Indicator tracks seed and early-stage investments of the world's 15 most successful VC firms to gauge how areas of tech are trending.
So which segments stood out in Q3?
Web3 and DeFi topped the charts yet again—pre-FTX collapse, it should be noted—notching $879 million of investment in our ETI dataset.
Fintech and biotech followed close behind, while insurtech and mobility gained little traction: | | | | | |
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Agtech Public Company Comp Sheet and Valuation Guide
Recent agtech IPOs have underperformed the S&P 500 by about 10% so far this year.
Weak stock performance in the sector could diminish exit prospects for late-stage VC-backed companies, and startups may have to start cutting costs soon.
Our research lays out agtech comps data through Q3, including insights such as which companies and industry segments are staying profitable (hint: animal biotech research): | | | | | |
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Make sure to add this one to your calendar: - 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: - Why investing at the seed stage is going to become riskier. [Fortune]
- Top VCs continued to target early-stage opportunities in Web3 & DeFi during Q3—more than any other vertical—but expect crypto interest to wane following the FTX collapse. [Institutional Investor]
- There are areas of the crypto ecosystem that are less exposed to trading activity and thus less impacted by the FTX fallout. [Reuters]
- Debt has become both more expensive and harder to come by. "It is a factor of some banks backing away from doing private equity deals, not entirely, but doing less." [Bloomberg]
- When it comes to interest in owning professional sports teams, "there's always demand and there's always scarce supply." [AP]
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) - DACH Private Capital Breakdown
- Analysis of insider-led VC rounds
- ETR: Supply Chain Tech (sneak peek!)
- ETR: E-commerce Launch Report
- ETR: Crypto Launch Report
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| Worried about increased regulation and the need for greater transparency? | | With the increased pressure to offer LPs transparency and reassurance, GPs need to pivot from reactive responses to proactive communication. Predominantly, they must: - Evolve from manual data extraction to automated analytics.
- Expedite LP requests by shifting to live dashboards.
- Centralize communications in an always-on
LP portal. Unfortunately, this is easier said than done.
Altvia can help you demystify this daunting process with their helpful Data & Tech Guide for Private Equity firms. Read today and access the following and more: - A checklist for formulating a data strategy.
- Examples of data-related workflows.
- Recommendations for data strategies broken out by firms’ level of need.
Get started | | | | | | | |
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| | Since yesterday, the PitchBook Platform added: | | 234 Deals | 912 People | 222 Companies | 21 Funds | | | | | | |
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