In its latest round of research reports, Pitchbook analysts paint a contrasting picture between PE and VC markets in their latest quarterly breakdown. Compared to many recent quarters, Q2 remained quiet for the venture market while PE finally saw some green shoots emerging.
With several points of promise, PE may see a resurgence in the second half of the year, according to Pitchbook. Exits were a bright spot in PE in Q2, surging by 67% from the quarter before. This was the best quarter for PE exits since they crashed six quarters ago.
Green shoots in PE also took hold from the funding side. Loan markets were another bright spot in Q2 as big banks slowly waded back into the leveraged loan market. After taking an eight month leave of absence from underwriting any new loans for large take-privates, a trickle of announcements started in February and accelerated in March.
Explosive Start to 2024 In the Offing?
As the leveraged loan market improves, funding from private credit funds, which continued to lend all along, continues. This steady funding source has kept PE deal flow alive for the past several quarters despite headwinds in other areas. Due to private credit the industry has maintained pre-pandemic levels of deal activity despite the steepest rate hikes in more than 40 years. With private credit anchoring PE deal flow, a rebounding leveraged loan market may lead to an explosive start to the coming year.
While PE has shown strong signs of recovery this quarter, VC markets may need more time, according to Pitchbook. The good news is some of the headwinds holding back VC markets have lightened. However, shifting macroeconomic forces are yet to translate into material change for the sector.
The second quarter of this year saw deal counts leveling off in VC, while exits and fundraising remained slow. And while no major players collapsed, a la Silicon Valley Bank, that doesn’t mean VC is on an immediate road to recovery. The reset remains in full force. Valuations continued their declines at the later stages, with venture growth seeing the deepest cut.
It seems clear that the venture market taking shape will not have the same grow at all costs mentality that we’ve seen in years past. VC firms are taking a much more cautious approach, allocating capital as efficiently as possible. This is a major change from the loose financing climate of 2021. The upside, according to Pitchbook, is that this new approach is likely to create a more sustainable environment.
Cody Crook, managing director of Hunt Scanlon Ventures, unpacks what it all means for talent markets and the human capital sector.
Cody, how will VC’s changing playbook affect the talent market across the sector?
As Pitchbook noted, market conditions have affected playbooks in the venture market significantly. These changing market conditions will certainly affect the talent market for venture capital. With firms looking towards more capital efficient investment strategies, we aren’t seeing the same win-at-all-costs mentality that we have witnessed in years past. The changing playbook means VC firms are looking to bring in a different type of leadership. One interesting trend we’ve noticed is that VC firms are looking to bring in leaders with PE experience. This is because PE has been focused on capital efficient growth throughout the past market cycle. Leaders with this type of experience will be better suited to meet the changing needs of VC firms.
And in PE, how are market conditions reflected in the talent market?
We’ve seen a change through the start of this year in the type of demand for PE operations roles at the fund level. This reflects a belief from firms that explosive growth may continue to face some constraint. Therefore, firms want to drive costs out of their portfolio companies. Firms are looking to hire operating partners that focus on operational excellence rather than on growth.
How competitive is the market for this specialized talent?
It is extremely competitive according to VC and PE executive recruiters who we have touchpoints with across both sectors. In both PE and VC, firms are competing with a long list of other industries, such as tech companies and start-ups, to attract of short list of qualified applicants with the necessary skill sets and experience for their industries. In their Private Equity Talent Benchmark Report, Bespoke partners noted that average cash compensation in PE has risen almost 20 percent since 2018. It truly is a sellers-market. This makes it very difficult to both attract and retain qualified candidates who may have multiple options.
What steps are firms taking to make themselves more attractive in this seller’s market?
This question has been top-of-mind for many of our friends in PE. Attracting and retaining top talent is a critical factor in continuing growth despite challenging market conditions. Some firms have had to reevaluate their strategy for attracting such talent, given the changing expectations of the next generation of top talent. Many of the firms we’ve spoken with are investing in people-centered leaders and robust culture strategies. These firms are investing in a long-term growth strategy that will make them desirable points for the best and brightest of this upcoming generation to land. It’s an interesting strategy which may prove to provide a competitive advantage during uncertain times.
Cody Crook is managing director and head of investment strategy at Hunt Scanlon Ventures - an M&A advisory firm that specializes in the human capital space. Cody is responsible for co-managing the firm's investment portfolio, which includes executive search, talent acquisition, private equity, and investment firms. Leading the investment team, he spearheads all fund transactions and maintains portfolio developments. He is also responsible for sourcing, managing and monitoring investments and working with external portfolio managers, analysts and investors on active and prospective transactions. Connect with Cody.