In 2023, private equity and venture capital grappled with the twin forces of inflation and rising interest rates. Not surprisingly, these pressures impacted deal flow and valuations, according to Bain & Company. More of the same is likely for 2024, although, at the same time, firms are rapidly adapting to these headwinds. Evidence of that change can already be seen: despite the decline in dollars invested in venture capital in 2023, the number of deals completed remained strong. Let’s take a look at what else is likely ahead for the coming year.

Continued Momentum in ESG and Impact Investing

The move towards sustainable and socially responsible investments continues to gain momentum worldwide. That trend is expected to continue into 2024. As a result, VC and PE firms are increasingly aligning their portfolios with sustainable practices. That makes sense since this trend is supported by data showing that ESG-focused investments are not just ethically appealing but also financially rewarding. For instance, research by McKinsey suggested that ESG-focused companies tend to have higher valuations and better operational performance. And newer global studies echo similar results, showing that ESG is likely here to stay. So, we’ll look for a continued focus on impact investing in VC and PE activities.

Innovation and Technology Still a Driving Force

Another seemingly unstoppable trend is technology and innovation in that realm. Especially in sectors like artificial intelligence (AI), this trend will likely remain in the spotlight.

The global artificial intelligence market is projected to expand at a compound annual growth rate (CAGR) of 37.3% through 2030, per Grand View Research. Advancements are not just limited to the technology sector but are set to influence a wide range of industries:
• Healthcare, with AI-driven diagnostics and personalized medicine
• Finance, through automated trading and risk management systems
• Retail, with personalized shopping experiences and inventory management
• Manufacturing for enhanced automation and predictive maintenance
• Transportation, particularly in the development of autonomous vehicles
Even in creative industries like entertainment and advertising, AI is being rapidly developed for use in content creation and targeted marketing strategies. So, expect AI to continue to take center stage on the venture capital front.

Rising Trends in Secondary Markets and Co-Investments

2024 will likely witness a continued rise in the popularity of secondary markets and co-investment opportunities. These alternatives are offering more investors a means to diversify investment portfolios and mitigate risk. According to CAIS, activity in secondaries was fairly muted in much of 2023. However, it is believed that the growing volume of institutional and individual investors seeking diversification will continue to drive growth, even though it will likely be at a slower pace.

Expect Increasing Regulatory Scrutiny

The PEVC industry faces a landscape of evolving regulatory frameworks and political challenges, varying significantly across different countries. Of course, these industries are certainly not alone; KPMG cites the likelihood of increased scrutiny and public input on regulation in many regions of the world.
In 2024 and beyond, it is probably prudent for PEVC firms to revisit policies and procedures to ensure all stakeholders are kept informed. Transparency is encouraged in deal structuring as well. Then, staying abreast of regulatory changes is crucial for maintaining compliance and being aware of shifts that could impact future investment opportunities.

Resilience and Adaptation in the Face of Global Economic Forces

Over the recent economically challenging months, the global PE market has shown remarkable resilience, particularly in smaller and mid-sized segments. Regional dynamics will also play a hand in local trends. For example, in Europe, increased capital flows to private turnaround and value strategies are expected, driven by the increased cost of capital and pressure on profitability. This trend reflects a strategic shift in response to the economic climate and presents unique opportunities for growth-oriented investments.
In contrast, China’s PEVC market is expected to continue cautiously navigating geopolitical tensions. Fundraising challenges due to these issues and technology investment restrictions are reshaping the investment landscape in China. Firms in this region are adopting more selective and informed approaches, focusing on sectors less impacted by international policies.

Key Takeaway

As we look ahead to 2024, the PEVC sectors need to be prepared to navigate a complex and dynamic environment. The keys to success in this landscape will likely be the ability to adapt to changing market conditions, embrace technological advancements, and commit to sustainable and impact investing. Firms that can effectively balance these elements while navigating regulatory challenges and seizing new opportunities will be well-positioned for success in the evolving PEVC landscape.