The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only. All investing involves risk. Please refer to risks at the end.
Venture capital and IPO update
As investors look to 2024, many are wondering what to expect from venture capital markets in the year ahead. In the late-stage growth sector, closest to the public markets, we have been encouraged by the continued normalisation of deal activity levels and expect this trend to continue. We are not seeing the frenzied activity of 2021 – 2022 but instead believe that we have returned to the more moderate levels of 2014 – 2019. There are limited players with dry powder to invest in this stage and we believe this could yield favourable valuation dynamics similar to those seen over the past year.
Secondly, we expect IPO activity levels to improve over the next year. As we’ve previously highlighted, the IPO window tends to “close” for one to three years on average. We’re now nearly done with the second year of decreased issuance levels so we anticipate the market may start reopening in 2024, providing an opportunity for the right late-stage companies to exit.
While the market environment is dynamic and can change quickly, we’re excited about what we see ahead. With more moderate competition, the extreme volumes of 2021 – 2022 aren’t necessary to execute deals. We believe 2024 will offer opportunities to invest in great companies at rationalised prices for patient investors. Additionally, while the postponed IPO market means fewer exits for companies in 2023, it also increases the possibility that attractive companies that are close to going public may raise a final round to bridge their runway to an opportunity in 2024.
In the coming months, look for our 2024 venture capital and private credit market outlooks, where we will provide in-depth research and perspective on the state of the private markets. In addition, Sector Lead, Consumer and Technology, Matt Witheiler will launch the 2024 season of our WellSaid podcast, going into more depth on what’s to come for venture capital in 2024.
SECTOR TRENDS
Late-stage growth
We believe some of the late-stage fundraising rounds in the market today are late stage in name only. With the AI boom underway, a meaningful percentage of rounds above US$150 million are in AI companies with little to no revenue. We believe that they are essentially at the seed or early business stage by all metrics except for capital raised and valuation.
Late-stage biotechnology
Investors continue to gravitate away from the higher-risk stories (preclinical stage, new modalities) that dominated the “plentiful” times, and toward more derisked clinical programs advancing well understood modalities such as antibodies and small molecules. Additionally, there appears to be growing interest in companies pursuing cardiometabolic and immunological diseases, which offer larger addressable markets.
Multi-stage climate
2023 has seen a record number of billion-dollar climate disasters. Fuelled in part by this urgency, climate solutions continue to represent one of the fastest-growing sectors within venture capital, reaching 9% of the VC market’s deal count in 3Q23.1 Notably, the sector is experiencing a slowdown in deal activity in 2023, consistent with the broader VC market. Despite the slowdown, climate companies are showing greater resilience in valuations, underscoring the level of interest in the space, though deal sizes have declined as investors emphasise capital efficiency.
Early-stage venture
We have started to see an uptick in quality early-stage deal flow. Many of the better-performing companies are coming back to market and have met or exceeded their initial projections. Although a majority of companies in the market are still reconciling the reality that they need to raise either a down or flat round, we believe many higher-quality companies have accepted the new valuation environment.
Investment-grade private placement
The investment-grade private placement market — long dominated by large insurance companies — has seen new asset managers enter the market, helping to expand the issuer base and improve investor access to private placements. We believe identifying managers with disciplined underwriting standards and differentiated origination capabilities driven by long-standing relationships with key market participants will be critical to success in this environment.
Long/short hybrid financial services/fintech
The fintech space is finally showing some acceleration in deal activity after five quarters of slowdown. Many fintech companies were better at managing runway and cost-cutting during the slowdown thanks to 2021’s funding bonanza in the space. But now reality is setting in, valuations are correcting and management teams are adjusting to the new environment. We are seeing special interest in digital lending, payments and insurtech segments.
1Source: PitchBook. Data as of 31 October 2023.
ESG and impact highlights
ESG:
Governance best practices in public markets
For private companies approaching the public markets, we highlight the corporate governance best practices that can help pave strong relationships with public market investors.
Why climate change matters in private markets
The critical role of ESG for private companies
Explore our full ESG insights for private companies series with our latest research on governance, DEI, climate, and much more.
URL References
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Impact:
Decoding impact expectations: best practices for impact investors and companies
We share three recommendations each for impact investors and companies to help them better understand and manage each other's expectations.
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News, insights, team, and/or events
Forbes | Wellington Access Ventures Raises $150 Million To Back Underrepresented Founders
Our Wellington Access Ventures Team sat down with Forbes to discuss the final close of the private investing platform’s first early-stage venture capital fund and how they look to partner with "the next industry-defining companies."
Source: Forbes.
Wellington Management announces US$150 million final close for Wellington Venture Investments I
Meet the Manager: Greg Wasserman, head of private climate investing, loves partnering with entrepreneurs "coming up with the next more innovative way to deploy" climate tech. Learn why he believes innovation is driving efficiency, climate benefit and better products.
Understanding private equity performance
We dive deep on best practices for measuring and benchmarking private equity performance. In addition, we outline the J-curve and the impact of fund lifecycle on returns.
Private equity deep dive
We explore four key private equity questions to help investors better understand how these strategies compare and complement each other in a portfolio. In particular, we highlight the distinct opportunity sets, risk-return characteristics, and portfolio roles of venture capital and buyout strategies.
Private investing portfolio company interview with AMP Robotics CEO
Dr. Matanya Horowitz, CEO of AMP Robotics, highlights how the company integrates AI and robotics into the recycling industry and explores the “actionable guidance” Wellington provides on ESG and other strategic issues.
Private investing portfolio company interview with RayzeBio CEO Ken Song
Dr. Ken Song, President and CEO of RayzeBio, discusses the company’s innovative approach to radiopharmaceuticals and highlights how Wellington’s public and private investment expertise is distinctive in the health care space.
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We welcome Private Placement Associate Jane Han and Deal Lead, Private Placements, Peter Venter to our Private Placements platform team joining Head of Private Placements Emeka Onukwugha, CFA, and Head of Portfolio Management, Private Placements, Elisabeth Perenick, FSA, CFA. Peter will work with portfolio managers, global credit analysts and other global research resources within the firm to identify and pursue investment-grade private placement investments. Both Jane and Peter will be involved in all aspects of the deal process including origination, underwriting, monitoring and analysis of globally sourced privately placed debt securities.
Major risks
Market risks
Broad investment flexibility
Liquidity risk
Sector risk
Country/currency risk
Transparency risk
Regulatory risk
Concentration risk
Risk of underlying assets
Extended term and liquidation
Layered fees
Loss of key personnel
Change in investment policy
This is a summary of some of the major risks.
For professional, institutional or qualified investors only. Past results are not necessarily indicative of future results. There can be no assurance the funds will achieve their investment objectives or avoid significant losses.
Any securities mentioned are for illustrative purposes only and are not intended to be an investment recommendation. There can be no guarantee an investment in any portfolio company will be profitable or avoid losses. For a complete list of the private equity strategies’ investments please see https://www.wellington.com/en-us/institutional/capabilities/private-equity.
The private strategies differ in stage with some making earlier stage or venture stage investments whereas others are later-stage strategies. The risks associated with early-stage investing differ from late-stage. Additionally, each strategy considers ESG and sustainability in different ways according to its investment strategy and objectives. Please refer to each strategies offering documents for a complete discussion of risks and details regarding investment strategy.
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