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Venture Capital Deal Flow Hits Q1 Record

calendar_today May 18, 2021

With the yield curve steepening and additional stimulus measures taking hold, the markets remain close to highs despite the recent volatility. Private investments are also off to a robust start in 2021 as many Covid impacted deal delays from 2020 worked their way to completion during the first quarter.  We expect deal activity to continue to pick up as the economy maintains its recovery and states embrace a full reopening following the pandemic shutdowns. While interest rates are still near historic lows, the rising rate environment has had many wealth advisors looking beyond alternative income and more towards equity-oriented alternative investment strategies. As such, areas that we remain excited about are Venture Capital (“VC”) and Growth Equity, even as investors have begun to rotate out of growth and into value in the public markets.

While the pandemic caused significant challenges for most industries, technology and software thrived.  According to Preqin, total VC deal value in North America set a quarterly record in Q1, exceeding $70B, despite deal volume trending downward. (See chart)

We are seeing some of the bigger Growth managers coming back to market with larger raises. The graph shows that these funds are betting on bigger, later-stage deals in fewer names.  As such, funding has rotated to surer things and it was more difficult for start-up businesses to attract capital.  We believe part of this is a function of the diligence environment and with the economy reopening, we expect more capital to be put to work with earlier stage businesses once again.  The SaaS (software as a service) market continues to support new businesses and the amount of forecasted cloud service spend increased to $156B for 2022 compared to $75B in 2018.

As the universe of publicly traded companies continues to shrink, Growth Equity and VC companies become critical areas within the SaaS space for investors to access early in a company’s life cycle. The larger-cap, big technology companies have dominated market performance in the years following the credit crisis and have led to an outsized representation in market capitalized indices such as the S&P 500.

While we saw larger valued VC deals last quarter, we believe that this was a short-term effect of the pandemic and that VC and Growth Equity private equity will be the best ways for investors to gain access to these companies.  Beyond software and SaaS, electric cars and health care are the other key areas of innovation where VC and Growth Equity will help further create industry disruption.

All of these segments are key components of the new economy and the pandemic only accelerated the capital inflows and advancement of these companies.  While the public markets have seen a welcome rotation into value names, we believe in the longer-term trends of these new economy sectors and believe the best way to access them now is through the private markets.

For more information on how to access PPB’s platform, please contact Frank Burke, CFA, CAIA, Chief Investment Officer, PPB Capital Partners, 484.278.4017 Ext. 108 or at fab@ppbadvisors.com.

Download: PPB – May 2021 Market Update

Important Footnotes and Disclosures

Fig 1: Source: Preqin

Fig 2: Source: IDC (https://www.idc.com/getdoc.jsp?containerId=prUS43511618)

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