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Heading into 2023, valuations in private equity look more attractive than they have in quite a while. This seems to be the case across the private markets, from venture capital to the late-stage segment. The adjustment began early in 2022, with the substantial pullback in public equities. Since then, the market has wrestled with a new regime of high inflation, interest rates, and volatility — conditions many investors today have never experienced.
Despite the uncertainty and risks this environment presents, I’ve rarely seen a market with opportunities this compelling in my 30+ years of investing. This outlook is driven by normalizing multiples, continued innovation across many sectors, and, in a number of cases, fewer competitors for the most attractive deals.
Both the number of and amount of funding for new deals have fallen precipitously this year as investors and companies struggle to adapt to these new market dynamics. The impact of this decline is being felt across early-, mid-, and late-stage markets. For example, Figure 1 shows the substantial decline in consumer and technology VC deals.
The decline has been especially sharp in the late-stage segment. As my colleague Matt Witheiler puts it, companies have been going through the stages of grief, starting with “denial,” progressing to “bargaining,” and finally reaching “acceptance” of the new valuation reality. Some have held on to the hope that the valuation multiples of 2021 will return, but I think that’s unlikely in the near future. The path to 2021’s valuations was paved by extremely low interest rates, pandemic-accelerated trends, and other macro factors that we believe are unlikely to resurface in the years ahead. In our view, we’ve returned to a much more normalized valuation environment.
Amid the downturn in deals, I’m often asked if I’m worried about the plummeting number of IPOs. My answer is that the IPO market is low on my list of worries. Looking across early-, mid-, and late-stage private companies, I believe the level of innovation continues unabated in biotech, climate tech, and other sectors. We are just scratching the surface of disruptive technologies throughout the market, and, in my view, that should inevitably lead to innovative new companies going public. The IPO market has closed before and historically it takes about 12 – 24 months for it to bounce back from similar periods of reduced activity.
Excitingly, many of these disruptive companies have grown significantly and continue to have great business models but are now available at valuations that look much more reasonable than they did a year ago. I believe firms with experienced management teams that are dedicated to building substantial funding reserves and adjusting their spending plans to reflect the new regime should be well-positioned to weather today’s challenges and will be particularly appealing investment opportunities.
Today’s private equity market is volatile, and the macro backdrop will continue to present numerous risks and opportunities for private companies. Critically, after a few years of rapidly rising valuations and hypercompetitive deals, I think the private equity landscape has shifted to a “buyers’ market.”
In my view, this is particularly true because many large allocators that invested at the height of the frenzy are now pulling back from the market, leaving an opening for active investors to find potential long-term winners at attractive valuations and with less competition. As we look to 2023, I believe that this represents a very compelling environment for investors with dry powder to deploy capital.
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