The first quarter of 2024 has been a roller coaster from a market perspective. Inflation remains stubbornly high, above the FED’s target rate of 2.0%, IPOs have seen a significant uptick from months passed, VC fundraising has dropped to the lowest levels since 2018 and the venture community has amassed approximately $300+ bn in dry powder. There seems to be a general sense of optimism that 2024 could be a turnaround year but is positive sentiment justified or just wishful thinking.
Inflation:
The Federal Reserve led by Jerome Powell, continues to fight inflationary pressures and given the most recent print in March 2024 of 3.5% vs. the preceding month’s level of 3.2% the FED has signaled that they will keep interest rates higher for longer in order to mute inflation’s effects. With inflation remaining at elevated levels, the cost of capital for venture and private equity financing remains higher than what has been seen historically which will likely temper deal activity for the balance of the year.
IPO Landscape:
It appears investor sentiment has changed and the IPO landscape is improving. Through the end of the first quarter of 2024, there have been 63 IPOs that have come to market which is approximately 7% higher than the same time in 2023 which had 59 IPOs. This bodes well for venture and private equity as the pathway to monetization has “un-stuck” itself and is forecast to continue for the balance of 2024.
Source: StockAnalysis.com
VC Fundraising:
2023 ended with venture funds raising $81.8 bn verses $188.4 bn in 2022. The numbers of managers raising is also notable as the ~$81.8 bn in 2023 was raised across 597 funds as compared to 1,458 funds in 2022. Although 2023 marks the lowest level of fundraising since 2018, 2024 is on track to be even lower. As noted by Pitchbook, fundraising in Q1 2024 came in at $9.3 bn which implies that 2024 will end with around $37 bn in total funds raised. This is the lowest amount of capital raised since 2013 and will be a 54% decline from 2023 levels.
VC Dry Powder:
According to Pitchbook, venture funds were sitting on approximately $312 bn in dry powder going into 2024. The harsh realities of today’s market are that general partners are being more cautious, focusing on fundamentals and generally deploying capital at a slower pace. Given the fervor of the fundraising environment from 2020 to 2022 it is no surprise that a course correction was inbound especially in the face of persistently high interest rates, multiple global conflicts and a frozen IPO landscape. On the one hand, it is nice to be sitting on billions of cash (just ask Warren Buffet) to execute on the right deal when it presents itself, on the other hand general partners need to invest money to produce returns for their limited partners. Given that capital is not free (anymore) those fund managers need to produce strong results or face having redemptions or potential failures as they proceed to raise additional funds.
Conclusion:
So, what does this all mean? There are some parts of the market that seem to be poised for positive change vis-à-vis increased IPO activity and plenty of dry powder sitting on the sidelines. However, inflation is still persistent, fundraising is forecast down by a significant amount in 2024 and on-going geopolitical turmoil is causing knock on affects across the market. It would seem, at least at this point in 2024, that it is looking like a replay of 2023 with the overall sentiment being one of “cautiousness” and “wait and see” for the balance of the year. The hope is that something will break free in 2024 giving way to a more consistent deal cycle that will jumpstart the ever-important venture engine.
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