Attorneys Witnessed Lowest Venture Capital Exits since Pandemic and 2008 Market Crash
In 2023, attorneys saw venture capital exits at their lowest levels since the pandemic and the 2008 market crash, according to a recent report by Bain & Company. The report, titled the Global M&A Report 2024, revealed that the total M&A market dropped 15% to $3.2 trillion, marking the lowest level in a decade. Private equity exits were also down by 44% in value and 22% in volume.
The report highlighted the biggest obstacle to dealmaking as the valuation gap, along with other challenges such as high interest rates, macroeconomic uncertainty, rising regulatory scrutiny, and new political pressures. J. Jeffrey Brown, a senior counsel at Faegre Drinker Biddle & Reath LLP's Indianapolis office, agreed that the market and venture capital exits are determined by interest rates.
Brown emphasized that lower interest rates and a better IPO environment are crucial for a strong exit market. He believes that the company's success attracts buyers from all over the country, making geography less of a factor in exits compared to the initial investing environment.
Despite the record low of 2023, Joshua Hollingsworth, a partner at Barnes & Thornburg LLP, is cautiously optimistic about the future of venture capital exits. He anticipates a potential improvement in 2024, although it may not be a total rebound. He predicts a "new normal" in venture capital activity rather than a significant recovery.
Brown emphasized the importance of a better environment for venture capital exits, including lower interest rates, lower inflation, and an improved IPO market. He believes that a reduction in interest rates and positive market signals would lead to significant improvements in the venture capital, private equity, and general markets.
The Bain & Company report predicts intensified competition in 2024 and expects to see more scale deals for consolidation before a return to growth-driven capability investing. The report acknowledges that higher interest rates have led some acquirers to shift towards scale deals due to their more certain cash flows. However, the market ultimately rewards growth.
Brown believes that Indiana has strong private companies that are venture-funded and poised for successful exits once the market conditions improve. He expresses the need for the right market environment to enable these exits to happen.
Another factor affecting venture capital and M&A activity is increased regulatory pressure. Hollingsworth notes that while the regulatory environment is well-equipped for single acquisitions, it may not be as robust for a series of acquisitions. He highlights that some companies engage in multiple acquisitions in a year, which regulators perceive as an antitrust concern.
The report by Bain & Company reveals that at least $361 billion in announced deals in 2022 and 2023 faced regulatory challenges globally. However, most of these deals ultimately closed, often with remedies to address regulatory concerns. The report also mentions that rising scrutiny and lengthening review timelines have caused some companies to withdraw their deals.
To navigate potentially challenging deals, the report suggests having conviction in the strategic rationale and a strong value creation story. It advises proactive divestitures to clear the path for significant dealmaking in the future.
Overall, while venture capital exits reached record lows in 2023, the outlook for 2024 shows cautious optimism and the possibility of a new normal in venture capital activity. The market environment, including interest rates and regulatory factors, will play a vital role in shaping future venture capital exits and M&A activity.
Analyst comment
Negative news: In 2023, venture capital exits reached their lowest levels since the pandemic and 2008 market crash. The total M&A market dropped 15%, to $3.2 trillion, the lowest in a decade. Private equity exits were down 44% in value and 22% in volume. The valuation gap, high interest rates, macroeconomic uncertainty, regulatory scrutiny, and political pressures hindered dealmaking. The market needs lower interest rates and a better IPO environment for a strong exit market. The forecast for 2024 is uncertain, but there may be a new normal in venture capital activity. Increased regulatory pressure also poses challenges for M&A deals.
