As an asset allocation strategy, “steady as she goes” doesn’t make for an interesting hot take.

So, let’s all overreact.

And to be clear, there are very good reasons to feel very bad about the outlook for VC and PE.

Someone named Jamie Dimon cited quantitative tightening, fiscal deficits, stressed consumer balance sheets, and the generally ugly geopolitical situation as creating “the most dangerous time the world has seen in decades.”

Feeling queasy yet? Buckle up, we’re just getting started.

2023 was a rough year for exits.  Global M&A was down 17% year-on-year, falling to a 10-year low.  IPOs were even worse, dropping 25% year-on-year to a 14-year low.  That’s despite notable market debuts including Arm, Instacart and Birkenstock. (Instacart is a busted IPO, off about 50%; Arm and Birkestock have clawed back modest gains after initially wobbling.)

That contributed to a year for private equity that was also, you know, rough.  PE deal activity dropped 40% to $846 billion globally in 2023 from $1.44 trillion in 2022, which was already significantly down from the prior year.  Money being returned to pension funds has “fallen off a cliff” and Goldman Sachs lamented that “this can’t go on for much longer.”

But VC was a bright spot.  Sorry, just kidding.  VC was even worse.  Funding for startups dropped 48% year over year.  Even with one out of every $4 invested in startups in 2023 going to AI, new investors were much harder to find – half the A and B rounds in 2023 were led by existing investors, perhaps loathe to adjust to overheated valuations.

It’s been especially rough for emerging managers in VC.  As of Q3 2023, they had raised only $2.3 billion, the first time since 2016 that number was below $20 billion. (In 2021, they raised $57 billion).

And the number of institutions investing in VC dropped 38% through Q3 – that’s 2,725 fewer firms doing deals.  Some are zombie funds who haven’t raised additional capital; some are crossover investors who have stopped allocating to the VC asset class.

And if you weren’t already reaching for the scotch, some measures indicate a 71% probability of recession before the end of 2024.

And yet…

Let’s not forget that 12 months ago, two-thirds of the brains at Davos (the World Economic Forum’s Community of Chief Economists) believed a global recession was likely in 2023, and 18% considered it extremely likely – more than twice as many as in their previous survey.  91% predicted weak or very weak growth in the US.

Verdict:  Wrong.  Very wrong.

So, how should we process this moment? 

Maybe the ugly private markets get even uglier.  Maybe the powder keg in the middle east detonates.  Maybe we realize AI mania (and valuations) have gotten silly.  (AI-powered cat doors, anyone?). Maybe that drives a correction in the NASDAQ’s massive run-up.  Maybe that further dampens private market investing. 

Or, maybe the expected rate cuts will do what they usually do: lower borrowing costs by businesses and households, unleashing spending and giving a lift to VC and PE-backed companies.  Maybe that makes alternative assets more attractive than parking your money in a CD.  Maybe VC investors sitting on nearly $300 billion of dry powder realize they need to start writing checks unless they want to give back capital.   Maybe the PE market starts to turn and drives an “avalanche of deals.”

As we’ve noted in previous posts, timing the market is impossible.  Optimizing outcomes for VC and PE investors is what we do.  But even on our best days, we don’t presume to be able to time the market.  It can’t be done. 

So, hot take: Steady as she goes