While you may not want to hear anymore about Covid-19, we can’t avoid it here. It is now the overwhelming driver in the venture capital and private equity sector.
Although significant trends were emerging in 2019, it is too early to analyze which ones will continue.
For ten years private equity firms have benefitted from a rising tide of business, in the number of deals to valuations and inflows of capital.
However, even before coronavirus there was overriding caution in the global private equity market. Mainly due to the US-China trade war, tensions in Hong Kong and Brexit.
Low economic growth has impacted negatively. The Chinese being the most pessimistic. There has been a brain drain in Europe, which has made them less positive with digitalization continuing.
Meanwhile, institutions have built up a lot of capital in reserve. Money has been attracted to private equity, so as not to be vulnerable to the stock market. There has therefore been an increase in family office businesses, in the last 2 years.
Now capital is moving differently, and venture capital looks very attractive. Corrections and the recent crash in the stock market benefit it. Deals in venture capital tend to come in clusters and opportunities may not be around for long.
Exit has changed for venture capital also. The route to liquidation is different, and before the option was to sell to a larger company or float. Now it is more likely to be a sale to a sovereign wealth fund or private equity.
With the expansion of global capital markets has unexpectedly come the increase of international venture capital, instead of staying local as previously. Immigration into a country, leads to more venture capital out of that country into the one the migrants left.
US markets were set to shrink, while emerging markets grew. Will this still be the case in a post Covid-19 world?
Environmental, social and corporate governance is now essential to screen investments.
Private equity considers this a way to add value, with the larger companies having raised the standard.
The changing behavior of consumers is the most significant disruptor. In China there is a trend towards more service based industries, which contributes to this.
IT And Healthcare.
These sectors are considered bullish by private equity, which prefers local investment. However, some North American firms are looking to Europe and Asia for opportunity.
Generally, investment is going to non cyclical and recession resilient assets, in very profitable sectors.
There are movements in the technology arena, particularly SaaS tech businesses are getting investors excited. They are funded by private venture, deals are difficult to access but the rewards are potentially high.
Awash with cash, some tech companies have begun venture capital investing eg. Alphabet’s Google Ventures, Intel Capital, and Salesforce Ventures are the most active of these, but also notably Microsoft and Quallcom are involved. Slack is a newer company that has followed suit.
Now Facebook has set up a venture arm, for which it has been seeking the top tech talent. The company has deep pockets with over $60billion in cash, and the fund is thought to be well financed. It is considered to be for incubating startups, whereas in contrast Google ventures has a more general approach.
Facebook is always on the lookout for the next big thing in social media, but is limited by antitrust laws regarding larger purchases.
The fund would be within its experimental apps team, which has recently worked on projects for teenagers and podcasts amongst others.
Some companies have venture funds in order to absorb the successful fledglings at a later date. This could be Facebook’s intention.
As a result of coronavirus, the venture capital landscape features layoffs and fewer deals, particularly long term ones. There is less funding from beyond the usual investors. European capital has significantly declined.
More startups may turn to financing via debt.
Some venture capital businesses have benefited from the Payment Protection Program (PPP), whereas some startups aren’t eligible for help. Profitability is now prioritized over growth.
Considering the most active venture capital firms, few have done more deals than in the first half of 2019. However, some venture capital firms see an opportunity in this new era, as companies which adapt their operations, have some success.
With regard to exit, the market for IPO’s was seeing resilience, but that may have changed with some notable flops.
Private equity has seen bankruptcies and some closures. This is also seen in the UK, despite wealthy owners.
Latin American and African countries were very positive for venture capital and private equity, but will that still be the case?
After a decade of record setting growth, there is a new reality with Covid-19 in town.