Venture capital managers will raise bigger funds next year as the number of mega-deals rises to a new high in the U.S., according to a PitchBook forecast.
PitchBook analysts expect the median VC fund in the U.S. to increase to more than $110 million, a record level despite fund sizes leveling off this year. That’s partly because of rising allocations to the strategy and decade-high distributions to investors, they said in a report released Tuesday.
“This has enabled GPs to raise ever-larger funds as they fuel blitzscaling strategies and strive to keep pace with rising deal sizes,” the analysts said. “Blitzscaling, an investment strategy of giant round sizes spurring rapid growth,” has helped change the game in sectors where companies turn to VC firms to gain a “critical mass” of market share.
Today’s “unicorn mega-deal” trend emerged from the Great Recession, after central banks’ low interest policies pushed investors to seek yield in riskier assets, according to PitchBook. Rates have remained low in the economic rebound, fueling the continued popularity of private equity strategies such as venture capital, the analysts said.
With money flooding into the VC industry, more nontraditional investors such as hedge funds and other asset managers are competing for deals, according to PitchBook. These “tourist” investors have favored late-stage deals that tend to be larger and easier to evaluate, the analysts said, helping to drive up valuations in the industry.
[II Deep Dive: VC Mega Funds Are on the Rise]
While seed-stage deals have steadily declined over the past five years, nontraditional VC investors have recently expanded into early-stage financing in order to find bigger returns, according to PitchBook.
“The elevated access to capital for seed-stage companies due to competition from institutionalized angels and nontraditional investors has shifted power to startups,” the analysts said, “elevating pre-money valuations and deal sizes.”