CHIEF INVESTMENT OFFICER’S MARKET UPDATE (February 2024)

By Dr Savvas Neophytou (Chief Investment Officer, Deepbridge Capital)

In my most recent CIO Market Update (October 2023), I commented on how 2023 had been a challenging year across the venture capital ecosystem, as well as the economy and wider investment landscape. I also reported on how the UK remains at the forefront of global innovation and “the volume and quality of early-stage deal flow we see is unabated, with the UK tech and life sciences sectors continuing to create astounding devices, applications, therapeutics and software.”

So, what about 2024 and the current market? Well, although the flow of capital into venture backed businesses is yet to show consistent signs of recovery, we are seeing improvement to market sentiment as various elements of the early-stage venture scene redouble their efforts to help businesses at various stages of the private equity ladder. Those portfolio companies in our Exit Readiness Programme are witnessing increasing M&A (mergers and acquisitions) interest, whilst those seeking the necessary larger-ticket funding to scale are also now seeing signs of engagement by the market, with term sheets being appraised. This is great news and bodes well for the coming year and beyond, but I thought it prudent in this CIO Market Update to compare our sentiment and experience with what we are hearing elsewhere.

The landscape of venture capital (VC) and private equity (PE) markets is constantly evolving, influenced by global economic trends, technological advancements, and regulatory changes. As we delve into the outlook for 2024, drawing insights from various authoritative sources, it becomes evident that both VC and PE markets are poised for significant transformations. This analysis explores key trends, challenges, and opportunities, with a specific focus on the United Kingdom, showing why now is potentially a great time to be backing growth-focused companies via the Enterprise Investment Scheme.

2024 has already started encouragingly and we are seeing VC and PE activity steadily increasing after somewhat of a slow twelve-months. Deepbridge Capital’s portfolio of tech and life sciences companies, supported by Enterprise Investment Scheme (EIS) and Seed EIS (SEIS) funding, are already witnessing increasing levels of co-funding opportunities and meaningful M&A interest. Our expectation is that 2024 will see VC and PE levels bouncing back as investor confidence returns. The UK remains a great place to start and scale an innovative business, but the availability of capital is crucial.

PwC's recent report on global private capital trends serves as a valuable starting point for understanding the broader context of the VC and PE markets in 2024. The report highlights the increasing importance of private capital in funding enterprises across various sectors. As capital markets continue to adapt to the post-pandemic environment, PwC notes a surge in deal activity, with technology, healthcare, and sustainability-driven investments taking centre-stage.

In the context of the UK, PwC's analysis indicates a robust VC and PE ecosystem, with London maintaining its status as a leading global financial hub. The report emphasises the resilience of the UK market and its ability to attract capital despite uncertainties arising from geopolitical events, providing a positive outlook for investors in the region.

The key factors expected to shape the VC and PE landscape in 2024 have also been analysed by Nasdaq. Their report underscores the significance of technological innovation and digitalisation, driving investment strategies. It also discusses the increasing convergence between traditional PE and VC models, blurring the lines between the two. In the UK, Nasdaq points to the nation's commitment to fostering innovation through supportive policies, including tax incentives for startups and conducive regulatory frameworks. These initiatives position the UK as an attractive destination for both VC and PE investments, creating a favourable environment for growth-stage companies seeking funding.

Cambridge Associates also provided a nuanced perspective on the challenges and opportunities in the VC and PE markets for 2024. The report acknowledges potential headwinds, such as inflation concerns and supply chain disruptions, but also highlights the resilience of private capital markets.

For the UK, Cambridge Associates suggests that despite global uncertainties, the country's sophisticated ecosystem and investor-friendly policies will continue to support VC and PE activities. The report encourages investors to focus on sectors resilient to economic shocks, with the UK's technology and sustainable industries cited as promising areas for investment, echoing the sentiments of PWC’s analysis.

EY outlined key trends that private equity firms should navigate in 2024. The report emphasises the need for PE firms to enhance strategic and operational efficiency, adopt digital technologies, and leverage data analytics for better decision-making.

In the UK context, EY highlights the growing importance of environmental, social, and governance (ESG) considerations. With increased awareness and regulatory pressures, UK-based PE firms are urged to integrate ESG principles into their investment strategies to align with evolving market expectations and regulations.

Not to be outdone, Forbes have provided a forward-looking perspective on venture capital, outlining predictions for 2024. The predictions cover a wide range of topics, including the rise of decentralised finance (DeFi), increased investment in climate tech, and the growing influence of non-traditional investors.

In the UK, Forbes anticipates continued growth in the fintech sector, with London positioned as a key hub for innovative financial technologies. The predictions align with the broader trend of the UK maintaining its prominence in the global VC landscape.

Reassuringly, the optimism continues with Crunchbase's insights into startup funding and exits, providing a granular view of the funding landscape. The report indicates a stabilisation of startup funding, with a focus on sustainable growth and profitability. Additionally, the forecast for exits in 2024 suggests a positive trajectory.

In the UK, Crunchbase's data aligns with the overall optimism, indicating that UK-based startups are well-positioned for funding rounds and potential exits. The report underscores the resilience of the UK startup ecosystem and its ability to weather uncertainties.

The outlook for venture capital and private equity markets in 2024 appears promising, with several common themes emerging from reputable sources. The importance of technology, sustainability, and regulatory considerations is underscored across the board. In the UK, these trends align with the nation's commitment to innovation and its investor-friendly environment, bolstered by initiatives like the Enterprise Investment Scheme (EIS). These factors position the UK as a key player in the global VC and PE landscape, providing a solid foundation for growth and investment opportunities. As investors navigate the evolving landscape, staying attuned to these trends, including supportive schemes like the EIS, will be crucial for making informed decisions and capitalising on emerging opportunities. Whilst investment in early-stage unquoted companies should be considered high risk, EIS-qualifying venture capital investment opportunities have never been more accessible, with investment managers such as Deepbridge, allowing appropriate investors access to leading-edge investment opportunities.

Your support, as investors in early-stage companies is critically important, and it was pleasing to see the UK Government emphasise this importance in November’s Autumn Statement by announcing their intention to extend the Enterprise Investment Scheme by delaying the Scheme’s ‘sunset clause’ to 2035.

2024 also represents the 30th anniversary of the Enterprise Investment Scheme, which continues to do exactly what it is intended to do; supporting great growth-focused companies with more than £30 billion of capital, creating thousands of skilled jobs and powering the UK economy. All of this whilst offering private investors some of the most generous tax reliefs anywhere in the world.

Thank you for your ongoing support.

Sources

PWC: https://www.pwc.com/gx/en/services/deals/trends/private-capital.html  NASDAQ: https://www.nasdaq.com/articles/what-to-expect-in-private-equity-and-venture-capital-in-2024
Cambridge Associates: https://www.cambridgeassociates.com/en-eu/insight/2024-outlook-private-equity-venture-capital/#:~:text=In%202024%2C%20with%20diminished%20or,to%20fund%20transactions%20in%202024 
EY: https://www.ey.com/en_us/private-equity/five-key-trends-for-private-equity-firms-in-2024#:~:text=Summary,improve%20strategic%20and%20operational%20efficiency  
Forbes: https://www.forbes.com/sites/marenbannon/2023/12/19/14-predictions-for-venture-capital-in-2024/?sh=6dfac4855e2e  
Crunchbase: https://news.crunchbase.com/venture/startup-funding-steadies-exits-forecast-2024/