ANALYSIS: Private Equity Sped Up While VC Lagged in Q2

Private equity investors in the second quarter snapped a record-breaking five-quarter losing streak. The increase is the first positive movement for PE deals since 2021, and it occurred despite a decline in the number of deals in the quarter. At the same time, venture capital activity continued its slide in Q2, reflecting ongoing uncertainties and tighter financing options for early-stage investments.

Even so, both independent VC and corporate venture capital (CVC) are continuing to innovate in artificial intelligence, minority-owned businesses, and a broad range of other technology breakthroughs—including Formula 1.

Bloomberg data show that the Q2 increase in deal volume for private equity investments as a whole was driven by non-VC private equity deals. The amount of capital invested by private equity firms, excluding venture capital investments, increased in Q2 by approximately 39%, to $155 billion, despite the total number of these deals decreasing by 14%, to 1,140, in the quarter.

The increase in total volume, paired with the decrease in count, indicates a noteworthy shift in the average deal value of non-VC private equity transactions, which increased by approximately 6% in Q2 to $120 million. By contrast, the average value of the quarter’s venture capital deals was notably smaller at $29 million.

By any measure, the venture capital sub-sector had a discouraging Q2. Although VC deal activity had temporarily increased from Q4 2022 to Q1 2023, the general downward trend that started in Q4 2021 continued in Q2 2023 to round out the first half of the year.

There were approximately 2,800 VC deals in Q2 2023, marking a decline of 6% from some 3,000 in Q1 2023. The total volume of venture capital deals slumped as well—falling by 29% to $60 billion from the first to the second quarter of the year.

According to a recent Bloomberg News article, the decline in deal activity was most acute for early-stage companies, as the number of angel or seed deals fell by half compared to a year prior.

Capital Call Lines of Credit Faded Away

In the first quarter of the year, venture capital firms lost access to a key source of liquidity: capital call lines of credit. These credit facilities helped make Silicon Valley Bank a pillar of the venture capital ecosystem before the bank’s failure in March. The reported decline in the availability of capital call facilities is one reason VC funds have been slower to invest in startups over the past several quarters, compared to the torrent of deal activity we saw in 2021. If these facilities, or others like them, don’t rebound, the slowdown in VC dealmaking might persist longer than expected.

Capital call lines of credit provide cash to investment firms quickly—delaying the need for a fund’s limited partners to pay up on their capital commitments. These lines of credit are attractive because they streamline the investment process and allow funds to maintain higher reserves while providing lenders recourse against investors’ capital commitments.

Given the benefits of capital call lines of credit, it seems unlikely that they’ll fall out of favor in the VC sphere altogether. On the other hand the decreased prevalence of capital call lines may motivate investment firms to pursue different forms of financing or more concentrated strategies by which they make fewer investments, thereby diminishing the need for frequent capital calls.

Top Silicon Valley Companies Were Active VC Buyers

The 2023 Fenwick–Bloomberg Law SV 150 List ranks the largest public technology and life sciences companies in Silicon Valley by 2022 revenue. The two largest companies on this year’s list, Apple Inc. and Alphabet Inc., made noteworthy VC investments in the second quarter.

In 2023, Apple retained its spot at the top of the SV 150 based on its revenue, $388 billion, and its valuation this year reflects that. In June, Apple’s market capitalization rose above $3 trillion for a second time; it previously broke that threshold at the end of 2021 before slowly declining over the course of 2022, according to Bloomberg data. In Q2, Apple invested $25 million in three venture capital funds that work with minority-owned businesses, doubling its goal of investing $200 million as part of its Racial Equity and Justice Initiative, which launched in 2020.

Alphabet, second on the SV 150 with $283 billion in revenue, remained an active buyer through its venture capital arm, CapitalG, which specializes in late-stage and growth equity investments in tech companies. In April, CapitalG, formerly Google Capital, added $100 million to its $225 million investment in AlphaSense, CapitalG’s 11th-largest deal to date. The deal highlights Alphabet’s interest in AI tech, as the acquired company utilizes proprietary AI and large language models (LLMs) to provide insights on capital markets. CapitalG’s deal activity in the first half of the year suggests that Alphabet will likely remain one of the most acquisitive members of the Fenwick–Bloomberg Law SV 150 List.

Top VC Buyers

Bloomberg data indicate that the most acquisitive buyer in the venture capital corner of the market during Q2 was Y Combinator, which was involved in 31 deals, totaling $433 million. Sequoia Capital, an early investor in both Apple and Alphabet, ranked second, with 29 deals in Q2. In terms of deal size, Alphabet itself ranked among the top VC buyers with $1.4 billion invested across just two deals.

The Fastest Place in Private Equity

American private equity firm RedBird Capital brought a hint of excitement to Q2 with a surprise announcement that it would pair up with Hollywood actor Ryan Reynolds to lead a group of investors acquiring a 24% stake in Renault SA’s Formula 1 team, Alpine.

Private equity firms, corporations, and celebrities have flocked to Formula 1 after Netflix—number 11 on the 2023 SV 150 list—helped drive American enthusiasm for the sport with its “Drive to Survive” original series, which debuted in 2019. The show’s popularity paved the way for American tech companies looking to capitalize on a growing American fanbase and showcase their cutting-edge innovation, technology, and data processing capabilities.

Formula 1 teams depend on technological advancements to remain competitive, which makes the sport a logical focal point for tech companies like Amazon Web Services (AWS) and Dell Technologies. Even Apple and Alphabet have grown their presence in the sport. Since 2022, when Google became an official partner of the McLaren Racing team, it has provided more than just financial backing, as the McLaren team now uses Google’s technology to improve their cars’ on-track performance. And earlier this year, Apple, following Netflix’s example, ventured into Formula One with its own original movie, “Apex”.

In other analysis articles covering the Fenwick–Bloomberg Law SV 150 List: Preston Brewer’s July 12 analysis looks at the artificial intelligence risks that companies are disclosing in their SEC filings; and Abena Opong Fosu’s July 20 analysis assesses the latest mergers & acquisitions data.

Bloomberg Law subscribers can find related content on our M&A Deal Analytics resource.

If you’re reading this on the Bloomberg Terminal, please run BLAW OUT <GO> in order to access the hyperlinked content, or click here to view the web version of this article.