The venture capital arm of the Ontario Teachers’ Pension Plan anticipates that a slowing global economy, interest rate hikes and limited funding opportunities will drive private equity valuations down by as much as 10 per cent in 2023, according to a new report.
“So far, 2023 looks set to be another challenging year: the global economy is expected to slow, further interest rate hikes are expected and stock market volatility is likely to continue,” wrote Avid Larizadeh Duggan, senior managing director of Teachers’ Venture Growth, in a report covering the organization’s global investment outlook for 2023.
“Yet uncertain times produce opportunities for the best companies to shine — resilient teams who understand their customers and their pain points, who can make the tough decisions quickly and who are able to create enough flexibility in their businesses to remain funded through the trough will emerge victorious.”
The report — which was drawn from a conversation between Duggan and Edward Stanley, the executive director of research at Morgan Stanley and a member of the TVG community of founders — found private enterprises may be spending money faster than it’s being raised. While venture capital firms invested a record US$530.8 billion in 2022, only about US$200 billion to US$300 billion was allocated to private enterprises. The operational costs of private enterprises with valuations above US$1 billion reached between US$240 billion and US$360 billion during the same period.
As a result of the potential capital shortfall and unfavourable market conditions, the report found private companies are likely to receive lowered valuations during funding rounds in 2023. While this might deter some investors, Duggan noted TVG isn’t overly concerned by companies receiving lowered evaluations.
“A down round is not the end of the world. An analysis of 1,400 companies found the bankruptcy rate was no higher for those who had a down round than for those who hadn’t. These companies are two-times more likely to be consolidated by private equity versus seeing an [initial public offering] exit.”
Of the total amount of funding raised by venture capitalists last year, about 20 per cent was earmarked for infrastructure investments, noted the report, which found the largest area of spending within the segment was on projects related to the transition away from fossil fuels.
The report also addressed concerns facing public equity investors. Within the technology sector, leading companies, including Alphabet Inc., Apple Inc. and Meta Platforms Inc., have laid off about 95,000 employees. According to some estimates, more than 900,000 technology workers could be left without jobs by the end of 2023.
The report concluded that markets have overreacted to these recent layoffs. “But the figures aren’t quite as bad as they may seem. [Leading tech companies] . . . went on a hiring spree in late 2020, when economic conditions quickly improved following the initial COVID-19 crisis. The top 20 tech companies have now had to start cutting jobs, but these layoffs represent only 20 per cent to 30 per cent of incremental pandemic headcount additions.”