Private Growth Capital - Current Trends

Author: Zuleika Salter, Co-Head of Private Growth Capital, finnCap Group

Much has been made of the dearth of IPOs amidst current market uncertainty but how much of this relates to the private fundraising market? Is the private market in freefall mirroring public markets?

As for the current investor appetite for fundraisings, it is very hard to say as things are moving quickly. Funds themselves have a lot of cash that needs deploying. At the beginning of the year, we were seeing a surge of deals. However, in the last few months, with supply chain blockages, wage inflation, hike in energy prices, all exacerbated by the war in Ukraine, the market has become quite stagnant. Moreover, the biggest reason for the collapse in valuations is the impending recession. This naturally provides a challenging environment for scale-ups.

Dry powder – a cautious approach

For the private market it is not all doom and gloom. For a start, investors are sitting on a lot of “dry powder”; in fact last year was a record year for venture capital. However, caution has put a halt on rapid deployment. Last year, we saw a greater risk appetite from investors who were willing to pay high multiples for exciting growth stories. Now, it’s a lot harder.

VC investors generally want to invest in growth stories but more recently, they are afraid of high cash burn businesses because there is so much volatility in the market. These investors are therefore being cautious in their investment decision making. We are seeing instead investors putting additional money into their portfolio companies to protect existing investments.

Focus on stable growth and digital trends

E-commerce and the tech sector more generally, having enjoyed a huge boom in 2020-21, have crashed spectacularly. One of the concerns from investors is that they assume these companies are dependent on further fundraises later down the line, and perhaps sooner than expected. No-one is making wild bets. There is more of an appetite currently for stable growth, companies with a clear path to profitability (or exit).

Sectors which are in vogue are those which reflect technology advances and consumer trends, but which are not significantly exposed to cost inflation. The future of work is interesting. Winners include businesses which own, operate or supply digital working environments, or are involved in technology around automation and AI, or smart energy saving Proptech businesses. We will also continue to see a rise in Healthtech and Edtech. Infrastructure around EV charging vehicles and software will continue to increase.

In difficult times, investors look to quality of management first and foremost – those with a reputation and track record – who can navigate businesses through hard times. They want companies with strong balance sheets and cash inflows. Investors also want diversified portfolios to spread the risk of their investments.

Delivering growth ambitions

Acting as the bridge between company and investor, at finnCap we understand how an investor will perceive a business and help investors identify the right investments, making them understand business plans in the right way. We also have great experience of deals and a knowledge of the investor pool. It’s very different to public markets; each transaction has unique terms. We also have the benefit of being part of a full-service financial services advisory firm where we can bring in sector and service expertise as appropriate. 

It is a tough environment but one in which successful, stable businesses with strong management teams will continue to prosper and attract private growth capital.