Nearly Three-Quarters of LPs Plan to Cut Back on VC, Survey Shows

Venture capital is set to be the asset class that’s hardest hit by the fundraising slowdown in private markets.


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In the past year, almost all types of private market funds have encountered fundraising challenges amid deteriorating macro conditions and rising geopolitical concerns. But venture capital funds will have a particularly bumpy road ahead.

While 65 percent of institutional investors said they would increase allocations to buyout funds in 2024, only 13 percent said the same for venture capital funds, according to the latest study from Stifel & Eaton Partners, a capital placement agent and fund advisory firm. Meanwhile, 71 percent of investors indicated that they would allocate less to VC next year. This was far more than the proportion of investors who planned to cut their allocations in any other private equity category: The second-highest was growth equity, with 29 percent of respondents planning to scale back their allocations.

The study was based on a survey of 44 investors, commonly referred to as limited partners, with a wide range of private equity investments, including buyout funds, growth equity, venture capital, structured equity, and special situations. The survey was conducted between June 23 and July 26.

As of this first quarter, venture capital fundraising had already slowed to multiyear lows. Only 144 VC funds closed during the three-month period, significantly down from the quarterly average of 460 over the past five years, according to data from Preqin. The VC fundraising market has also become more concentrated in larger funds, with half of the capital raised in the first quarter going to just five funds.

“LPs are concentrating allocations within a narrower pool of existing managers back in market, shifting their focus to resilient sectors and asset classes, and reassessing top priorities when evaluating new private equity investments,” said Eric Deyle, managing director at Eaton.

According to his colleague Chris Maduri, also a managing director at Eaton, stale valuations are what’s keeping LPs from increasing allocations to VC funds. “The market we’ve seen over the past couple of years has been very concerned about valuation in venture capital,” Maduri said. While buyout funds are typically valued on a quarterly basis, VC firms usually adjust the valuations of their portfolio companies based on investment rounds. “You can go a year without changing the valuation of a company,” he said.

In terms of sector exposure, 80 percent of the surveyed investors said they would increase their allocations to healthcare funds next year, followed by industrial (60 percent), energy transition (35 percent), and technology (30 percent). Forty-one percent of investors said they would cut back on investing in the consumer sector, with an equal percentage saying the same for the financial services sector.

Sixty-five percent of investors identified continental Europe as having the best investment opportunities for private equity outside of the U.S., followed by the U.K. (41 percent), India (24 percent), and Southeast Asia (19 percent). Only 3 percent of investors said China presented the best opportunities.

The survey also found that LPs believe the tightening credit environment would present the greatest risk to PE performance, with 80 percent citing it as an issue. Fifty-nine percent of investors said that a potential recession would make it harder for PE funds to generate good returns, while 39 percent expressed concerns about the declining distributions to LPs.