Fall season begins, PE-VC investments dip 66% to $5.6 bn

The slowdown in private markets just got reinforced with private equity-venture capital (PE-VC) investments falling 66% to $5.6 billion (across 184 deals) in Indian companies in the first quarter of 2023. The slowdown in flows comes amid a 29% decline in investments in 2022 to $46 billion (across 1,261 deals) compared with $65 billion (across 1,362 deals) in the previous year. According to data from Venture Intelligence, the flows in Q1CY23 also mark a sequential quarter decline of 41% over Q4CY22 which saw $9.6 billion being invested across 236 deals. Volumes too declined 56% year on year compared with Q1 CY22 and was down by 22% over the immediate previous quarter (Q4FY22).

The slowdown follows an increase in the cost of funds as the U.S. central bank is on a record rate hike spree with nine consecutive increases, since March 2022, taking the benchmark Fed rate to a 16-year high of 4.75% to 5%. According to a report by Ernst & Young, the traditional financing markets for PE witnessed a significant deceleration last year as banks, which were binging on leveraged buyout exposure, are finding it difficult to sell off these loans, resulting in a lower appetite for fresh deals. As of November 2022, reportedly, banks in the U.S. had more than $40 billion of hung financing (bridge financing for acquisitions) on their balance sheets.

What is compounding the woes for VCs and PE players is the shrinking window for exits. Last year, globally, PE exit value fell one-third (32%) to $391.44 billion, according to private markets data tracker Preqin. The geopolitical turmoil amid rising interest rates, took the wind off public markets as PE-backed initial public offers fell to 52 involving $23.71 billion as against 196 IPO exits see in 2021 that cumulatively raised $74.50 billion --- nearly three times the number of 2022. Secondary sales, another prominent exit option, too, shrank to a five year low in 2022 to $51.97 billion, as per Preqin.

The slowdown in exits, as per PitchBook, a private market data and research firm, has, in turn, curtailed the appetite of limited partners (LPs) to cut fresh cheques, especially with non-core managers. According to PitchBook report, close to 80% of fund’s capital comes from reinvested distribution and with LPs consolidating their exposure, of the more than 500 funds that raised funds in 2022, the top 20 funds accounted for half of the raise. For instance, Blackstone, as of Q3 2022, had raised over $180 billion over the prior twelve 12 months. As per the report, amid elevated uncertainty, institutional LPs (endowment funds, sovereign wealth funds and so on) want to deal with the best in the business.

What is expected to further impact sentiment is the elevated inflationary pressure as Saudi Arabia and other OPEC oil producers recently announced a fresh round of production cut, over and above the two million barrels per day of cuts already in place until the end of this year. As a result, Goldman Sachs has lifted its Brent price forecast to $95 a barrel by the end of the year to $100 for 2024, prompting market experts to bet on a further rate by the Federal Reserve in May.

That being the case, back home, the slowdown in PE investments will only accentuate in the coming months.