Insights series / 05 February 2021
Three reasons it's a good time to be a Venture Capital Manager right now
1. It’s a good time to raise assets – which will more than double for the private equity and venture capital space by 2025.
Already the largest alternatives asset class, Preqin’s latest report shows that VC and PE combined will now represent more than half of all alternatives by 2025. This means the sector will more than double its assets from the current $4.4 trillion at the end of 2020, to $9.1 trillion by 2025.
Further, 80% of investors surveyed intend to increase the number of their VC / PE manager relationships over the next four years – which indicates smaller managers can expect to benefit from this allocation shift too, not just the big names.
2. It’s a great environment for VC managers to deliver great returns – and investors know this.
Venture capital and private equity funds have offered investors uncorrelated returns over the long term, a trend that is likely to continue to at least 2025 according to Preqin’s research. David Lowery, head of Research Insights at Preqin, said “our model shows that [venture capital and private equity] growth will continue... It’s a very exciting time to be a part of the industry.”
High earnings multiples assigned to deals is likely to continue throughout this period of easy monetary conditions, pushing potential returns higher. Low pressure on long term borrowing is also likely to stimulate new and even more sophisticated techniques to raising money, such as a wider use of subscription credit lines, where capital is invested prior to being called from investors, effectively leveraging returns.
The space is particularly compelling for investors especially when compared to other alternatives – for example, hedge funds are one of several asset classes expected to deliver less than 5% over the same time period and will suffer net outflows by 2025 as a result.
3. There will be more innovative start-ups and business disruptors emerging globally for VC fund managers to pick from.
Greater returns in the VC and PE space is driven of course by a steady supply of start-up and disruptor companies. In 2020, 93 new unicorns were minted despite the pandemic (according to CB Insights) not far off the 120 or so that emerged in 2018 and 2019. Such firms are expected to continue to emerge and flourish through to 2025, with industries like online grocery, healthcare, e-bike, gaming and EdTech expected to do well post-pandemic.
According to Preqin, “[t]here appears to be no stopping private equity and venture capital” – a sentiment we can agree with.