You know what they say: With high risk comes high reward. But the important question for any LP is this: Is it worth that risk?
When it comes to venture capital, limited partners don’t seem to think so. That’s what a new Preqin report on alternative investing in North America, released this morning, suggests. Limited partners, surveyed in June, are split on whether to allocate capital into venture funds or delay until 2024, according to the report.
“Respondents appear to think that VC can outperform private equity in the next 12 months, but also acknowledge that it may not be worth the risk,” the report reads, noting that more than eight out of 10 VC investors said that the meager exit environment was the main challenge to returns over the next year.
Here are four takeaways from Preqin’s latest report on alternatives:
1. LPs are increasingly turning to brand-name managers
Fundraising to private funds has decreased across the board, according to Preqin, with capital raised by private funds continuing to trend lower since the end of 2022. That pullback encompasses private equity, VC, and infrastructure funds.
But notably, LPs are shifting their attention to larger, more established “brand-name” managers, according to Preqin, which reported that, while funds raised by the ten largest managers had increased in every asset class between 2018 and May 2023, the allocation going to those mega-managers has grown significantly in the last year and a half, in particular.
In the 17 months ending in May 2023, the ten largest PE managers garnered 30% of LP commitments, up from 17% in 2018 to 2022. The largest VC firms fundraised 28% of capital commitments, up from 10% in the period between 2018 to 2021.
“I think that if you’re going to commit less capital to private equity in a more pessimistic market, you are going to go with the larger partners you’ve worked with in the past and have comparatively more faith that you will continue to perform,” Charles McGrath, AVP of Research Insights at Preqin, said in an email.
Who’s benefiting? The Preqin report specifically calls out KKR, Thoma Bravo, Brookfield Asset Management, ICG, and Advent International—all of whom name pension plans as some of their largest investors.
2. The East Coast is the new king of early-stage deals
In 2022, there were more early-stage deals in New York City than in San Francisco for the first time, according to Preqin data. While NYC may still lag in the later stages, New York, Los Angeles, and Toronto are all becoming bigger players in the early rounds. “This should over time translate into a greater share of late-stage deals being sourced outside San Francisco,” according to Preqin.
3. Thoma Bravo is leading the pack on A.I. deals
Thoma Bravo, Vista Equity Partners, and New Mountain Capital are some of the managers scooping up shares of A.I. companies, with A.I. investments making up at least 6% of their total deals, according to Preqin.
Blackstone Group has invested a whopping $56.8 billion in A.I.-focused deals—the most in aggregate among North American managers—though it’s a smaller percentage of its overall deal flow than some of the other players.
4. Private debt still attractive
All the LP respondents said they plan to invest at least the same amount of capital into private debt funds in the next year as they did last, with more than half saying they plan to invest more. And exposure to distressed debt, in particular, is on the rise, as high-interest rates put pressure on companies to sell assets at attractive prices.
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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Joe Abrams curated the deals section of today’s newsletter.
VENTURE DEALS
– Perfios, an Indian fintech company for credit underwriting solutions, raised $229 million in Series D funding, according to TechCrunch. Kedaara Capital led the round and was joined by Warburg Pincus and Bessemer Venture Partners.
– Arialys Therapeutics, a La Jolla, Calif.-based biotechnology company developing therapeutics for autoimmune neuropsychiatry, raised $58 million in seed funding from Avalon BioVentures, Catalys Pacific, MPM BioImpact, Johnson & Johnson Innovation, and Alexandria Venture Investments.
– SQream, a Tel Aviv, Israel-based data and analytics accelerator company, raised $45 million in Series C funding. World Trade Ventures led the round and was joined by Schusterman Investments, George Kaiser Foundation, Icon Continuity Fund, Blumberg Capital, and Freddy & Helen Holdings.
– CertifID, an Austin, Tex.-based wire fraud protection company, raised $20 million in Series B funding from Arthur Ventures.
– Binalyze, a Tallinn, Estonia-based digital forensics and incident response solutions provider, raised $19 million in Series A funding. Molten Ventures led the round and was joined by Earlybird Digital East, OpenOcean, Cisco Investments, Citi Ventures, and Deutsche Bank Corporate Venture Capital.
– Optera, a Boulder, Colo.-based ESG and carbon management software provider, raised $12 million in Series A funding. Next Frontier Capital led the round and was joined by Blackhorn Ventures, Mucker Capital, Overture, Engage, Massive, SaaS Ventures, Valo Ventures, AngelList, and Stout Street Capital.
– Alix, a Los Gatos, Calif.-based platform using A.I. to humanize estate settlement processes, raised $5.5 million in seed funding. Initialized Capital led the round and was joined by Magnify, Scribble, American Family Ventures, and Alumni Ventures.
– Scala Biodesign, a Tel Aviv, Israel-based company that’s intent on making the development of proteins into biotech products more efficient, raised $5.5 million in seed funding from TLV Partners.
– Gem Specialty Health, a Gem Lake, Minn.-based digital specialty care clinic, raised $5 million in seed funding. HealthTrend Capital led the round and was joined by Base10 Partners and Mairs & Power Venture Capital.
– Glass Health, a San Francisco-based A.I. powered notebook for clinicians to better manage and prescribe diagnoses and clinical treatments, raised $5 million in seed funding. Initialized Capital led the round and was joined by Tom Lee, Epocrates, Galileo Health, Connor Landgraf, Heather Hasson, and Trina Spear.
– Ascento Robotics, a Zurich, Switzerland-based company building autonomous security robots, raised $4.3 million in pre-seed funding. Wingman Venture and Playfair led the round and were joined by Tim Kentley-Klay, Ryan Gariepy, Daniel Kottlarz, Tobias Redlin, and others.
– Roseman Labs, a Utrecht, Netherlands-based computation software developer, raised €4 million ($4.3 million) in seed funding from Matterwave Ventures, Spacewalk VC, and NP-Hard Ventures.
– florrent, an Amherst, Mass.-based company developing high-energy density ultracapacitor technology to stabilize electrical grids and make renewable energy adoption more efficient, raised $2.1 million in seed funding. MassVentures led the round and was joined by MassMutual Catalyst Fund, AIN Ventures, Tale Venture Partners, NextFab Ventures, Boston Impact Initiative, and others.
PRIVATE EQUITY
– J.M. Smucker agreed to acquire Hostess Brands, a Lenexa, Kan.-based snacks company and maker of Twinkies, for $5.6 billion including debt.
– Cetera Financial Group agreed to take private Avantax, a Dallas, Tex.-based tax-focused financial planning and wealth management company, for $1.2 billion.
– KKR invested an additional $1 billion in USI Insurance Services, a Briarcliff Manor, N.Y.-based risk management, employee benefits and retirement consulting provider.
– KKR agreed to acquire an additional minority stake in Reliance Retail Ventures Limited, a Mumbai, India-based retail chain selling groceries, apparel, lifestyle products, and more, for $250 million.
– Neso Brands, backed by KKR, acquired a minority stake in Le Petit Lunetier, a Paris, France-based eyewear and optical brand, for $4 million.
– DirectMed, a portfolio company of NMS Capital, acquired Technical Prospects, an Appleton, Wisc.-based medical imaging equipment provider. Financial terms were not disclosed.
– DRT Holdings, a portfolio company of Mill Rock Capital, acquired Custom Machining Corporation, a Denver, Colo.-based company manufacturing automation machinery for the metal packaging industry. Financial terms were not disclosed.
– Netcraft, a portfolio company of Spectrum Equity, acquired FraudWatch, a Melbourne, Australia-based online brand protection provider that focuses on phishing and online scams. Financial terms were not disclosed.
– ShawKwei acquired ZymeFlow, a Houston, Tex.-based decontamination and chemical cleaning provider. Financial terms were not disclosed.
IPOS
– Instacart, a San Francisco-based grocery delivery platform, plans to raise up to $616 million in an offering of 22 million shares priced between $26 and $28. The company posted $2.9 billion in revenue in the year ending in June 2023. Sequoia Capital and D1 Capital Partners back the company.
– Klaviyo, a Boston, Mass.-based marketing and data automation provider, plans to raise up to $518.4 million in an offering of 19.2 million shares priced between $25 and $27. The company posted $585 million in revenue in the year ending in June 2023. Summit Partners, Shopify, and Accomplice back the company.
– Neumora Therapeutics, a Watertown, Mass.-based clinical-stage biopharmaceutical company, plans to raise up to $264.8 million in an offering of 14.7 million shares priced between $16 and $18. Amgen, ARCH Venture Partners, Biomatics Capital Partners, and SoftBank back the company.
– RayzeBio, a San Diego, Calif.-based radiopharmaceutical therapeutics company, plans to raise up to $259.2 million in an offering of 14.4 million shares priced between $16 and $18. Viking Global Investors, Versant Venture Capital, venBio Global Strategic Fund, and Pepti Dream back the company.
FUNDS + FUNDS OF FUNDS
– Sierra Ventures, a San Mateo, Calif.-based venture capital firm, raised $265 million for its 13th fund focused on North American seed and Series A B2B companies
PEOPLE
– SpringTide Ventures, a Cambridge, Mass.-based venture capital firm, hired Claire Elizabeth Smith as a principal. Formerly, she was with Meridian Street Capital.
Correction, Sep. 12, 2023: The online version of this newsletter has been corrected to reflect that ShawKwei is not backed by Spectrum Equity.
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