Private equity data provider Pitchbook is out with a fascinating look at their 2020 predictions versus reality so far. The predictions made by Pitchbook were likely not much different that most private equity forecasters. As such, here’s a look at expectations versus reality.
Forecast #1: The median pre-money valuation for seed-stage companies will eclipse $8.5 million
For the past decade, median pre-money valuations have consistently risen. Even though it is possible for pre-money valuations to continue to rise in 2020, perhaps reaching a decade or all-time high, the odds are not in early stage companies’ favor.
As of writing, the median pre-money valuation for seed-stage companies reached $7.5 million, down 11.8% from Pitchbook’s prediction. In 2019, pre-money valuations reached $7.7 million.
In addition to the general economy, another force that may prevent pre-money valuations from reaching $8.5 million may be that many seed investors may move upstream – seeking later stage investments – that stay with the riskier investments in 2020.
Forecast #2: 2020 will mark a new annual record for U.S. megadeals
Leading up to 2020, U.S. megadeals were on a tear. Megadeals reached 238 in 2019, well above values seen over the past decade. Prior to 2019, the highest number of megadeals was in 2018 at 209. The dollar value of megadeals had also exploded, reaching $55 billion in 2019, just off from the all-time high of $63.3 billion in 2018.
Given this background, it likely comes as no surprise that Pitchbook expected further expansion in mega-deal activity in 2020. Alas, that was not to be the case. Through June 18, 2020, the number of deals is only 119 and dollar deal volume has only reached $28.9 billion. Unless the latter half of this year has a explosion that likes of which the world has never seen, mega-deal activity will likely decline in 2020 relative to 2019.
Forecast #3: The median U.S. VC fund size will top $110 million, reaching a decade high
Interestingly, although the median U.S. VC fund size plateaued in 2019, Pitchbook still expected to see significant increase in fund size in 2020. The reality so far in 2020 has been less than what was expected. The median U.S. VC fund size through June 18, 2020 reached $100.5 million, only $9.5 million short of the $110 million target. Given this, it is unlikely that the median U.S. VC fund size will reach $110 million in 2020. A positive caveat to this downer is that VC fundraising is still growing quickly. If the trend through the first half of 2020 holds for the second half, 2020 may beat the record year seen in 2018 of $65.4 billion.
Summing Up
Overall, to say that 2020 has been a massive disappointment is an understatement. By most measures, the private equity industry’s lofty expectations are unlikely to reach, as are most forecasters’ expectations. May the latter half of this year prove to be a lovely surprise.
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