Investment Trends Driving Private Equity and Venture Capital Markets
Key takeaways
01
Interest rates affect debt usage.
Capital call lines of credit continue to offer enhanced internal rates of return (IRR) despite rising interest rates.
02
Focus on alternative liquidity solutions.
Firms have responded to a tighter liquidity environment by increasing their use of portfolio company notes to support their holdings.
03
Valuations come down.
Many venture capital funds have marked down the fair value of their portfolios this year.
Use of Debt Amid Rising Interest Rates
Capital call lines of credit (CCLOCs) remain attractive as a way to boost a fund’s internal rate of return (IRR), even amid higher interest rates.
When interest rates are lower than the non-leveraged return, CCLOCs offer more lift when there is more time outstanding on the debt.
Source: Preqin, PitchBook Data, Inc., and SVB analysis.
Source: PitchBook Data, Inc., SVB proprietary data and SVB analysis.
Searching for Sources of Liquidity
Portfolio company notes have gained prominence as a liquidity solution since the summer of 2022.
While the number of notes in use has risen, average balances per note have remained steady, suggesting wider use of this funding solution at similar dollar amounts.
Venture Capital Valuations: Flat Is the New Up
In 2023, the majority of venture capital (VC) funds have reduced their fair value-to-cost basis ratios.
Decreases in valuation may be less than some market observers initially expected due to a divergence in early- and late-stage valuations, with seed-stage valuations remaining significantly more robust.
Source: PitchBook, SVB proprietary data and SVB analysis.
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