In 2023, inflation and rising rates ended the post-Covid surge in valuations and dealmaking, creating uncertainty that left LPs and GPs waiting for clarity on the impact of persistent economic forces. Consequently, GPs were forced to rethink deal-sourcing strategies, tap new value creation levers, adapt financing structures, and reconsider portfolio company exits, and many LPs sought earlier paths to liquidity via the secondaries market.
Further, public market dislocations presented opportunistic investment avenues for some private equity investors while causing a major valuation reset that struck all stages of the venture landscape. Together, these factors played a key role in shaping private equity dealmaking activity in 2023.
In 2023, multibillion-dollar investments from VCs flowed into generative AI startups — with capital raised for AI companies outpacing funding totals in every other tech category and reaching $17.9 billion in the third quarter, climbing 27% globally YoY as overall deals for startups fell 31% from a year earlier.
Notably, most of the capital was funneled into two companies: Anthropic and OpenAI. OpenAI secured a prominent $10 billion deal from Microsoft this year, complemented by a $300 million share sale in April, valuing the company as high as $86 billion. Meanwhile, Anthropic also experienced significant funding success, raising a $450 million Series C round led by Spark Capital at a $5 billion valuation, along with a $300 million round in March. Amazon and Google have also made investments in Anthropic this year, cumulatively totaling $6 billion.
As the race to capitalize on the blockbuster opportunities of generative AI continues, VC investors find themselves competing against the checkbooks of major technology companies. In 2023, deals led by Microsoft, Google, and Amazon roughly amounted to two-thirds of capital raised by AI companies. Given big tech’s market capture of foundational model opportunities, VCs will likely pivot their focus to investing in companies across sectors that can leverage AI.
Beyond AI dealmaking, perhaps one of the most surprising pieces of news this year followed the abrupt and chaotic removal of Sam Altman as CEO of OpenAI by the board in November. While Altman returned to his leadership role and maintained his loyal employee base, the story illuminated the unique structure of OpenAI existing as a for-profit, venture-backed startup within a non-profit organization. This governance nuance not only highlights the risks of more complicated corporate structures but also shows that investors will happily accept these kinds of risks in order to participate in the upside of this transformative technology.
Down rounds have become increasingly prevalent in the venture and growth ecosystems. According to Carta, in Q1 2022, just 5.2% of new fundings were down rounds. By Q3 2023, that figure skyrocketed to 18.5%. While macroeconomic volatility in the public markets has infiltrated all venture stages, later-stage companies have borne the brunt of the impact. Per Carta, the median seed valuation got 5% smaller between Q1 2022 and Q3 2023, while the median Series D valuation fell by 50%.
Several high-profile deals underscore this trend. Stripe underwent a Series I funding round that valued the company at $50 billion — a steep discount from its 2021 valuation of $95 billion. Similarly, corporate card and spending management startup Ramp experienced a significant down round this year, securing a valuation of $5.5 billion, over 30% less than its previous $8.1 billion valuation.
While these valuations were lower than prior rounds, Stripe and Ramp have strong fundamentals and exceptional growth stories, promising massive returns to earlier investors. Therefore, these down rounds can indicate a healthy correction rather than a looming crisis for venture-backed businesses.
In 2024, recapitalizations and down rounds will likely persist, with increased scrutiny on startup metrics like profitability and cash burn. Companies with inefficient business models or lacking robust investor support will likely face continued fundraising challenges.
Dealmaking in the secondary market remained strong over the past year as LPs sought expedited paths to liquidity, and GPs looked to circumvent underwhelming exits to realize better returns from their highest-quality assets when market conditions improve.
In one of the year’s major LP-led secondary deals, Kaiser Permanente sold a $5 billion portfolio to a consortium including Ardian, Blackstone, and Apollo Global Management. This move by the California-based healthcare provider — aimed at rebalancing its overallocation to private equity — was one of several large LP transactions that revitalized the secondary market after the slowdown in the second half of 2022.
Alpine Investors’ $3.4 billion continuation fund for Apex Service Partners, backed by prominent firms like Blackstone Strategic Partners, HarbourVest, and Pantheon, stood out as one of the notable GP-led deals. This transaction underscored the increasing focus on single-asset continuation vehicles, which dominated secondary GP-led transaction activity in the first half of the year.
In the first half of 2023, private equity deal activity was led by large take-private transactions, which represented 81% of total private equity transaction value. A standout example includes the acquisition of Qualtrics by Silver Lake and the Canada Pension Plan Investment Board.
Qualtrics, like many tech companies, experienced a sharp decline in market value over the past 18 months, dropping from $28 billion in early 2021 to around $5 billion towards the end of 2022. Silver Lake’s $12.5 billion acquisition of Qualtrics underscores GPs’ interest in capitalizing on high-quality assets in the public market that may be currently undervalued.
Innovative financing solutions available via private credit also contribute to the appeal of take-private transactions. For example, many public companies targeted for take-privates have “legacy sponsors” with pre-existing financing agreements. Acquiring these companies with their existing debt allows private equity firms to bypass recent interest rate spikes, achieving better yields through lower interest payments and increased cash flow for investments.
Clean infrastructure investments continue to gain attention from private equity investors, supported by a number of government initiatives and the growing demand for sustainable energy solutions. The Infrastructure Investment and Jobs Act and the Inflation Reduction Act have significantly boosted this trend, providing $1.2 trillion in federal spending through 2032 and introducing a series of tax credits and protections, respectively.
Energy infrastructure, particularly in clean energy and broadband, became a focal point for private equity in 2023, as investors looked to capitalize on tax credits and interest rate mitigation from increasing power purchase agreement prices. Notable private equity infrastructure deals of 2023 include Redwood Materials’ $1 billion Series D round led by Goldman Sachs and Avaada Group’s $1 billion funding from Brookfield.
In 2024, many of these trends will continue influencing the private equity sector. Generative AI and infrastructure opportunities are poised to stay at the forefront of investment priorities, and take-privates, increased secondary activity, and continued down rounds will likely characterize deal activity themes this year.
Further, private equity investors will remain focused on strategic and operational enhancements to add value to their portfolio companies, balancing cost reduction with fostering future growth to best position portfolio companies for a more favorable exit market.
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