2024, A Year In Preview

Capital markets are all about positivism and negativism. If investors expect an adverse event, they will not deploy their money. Investors only invest when they're more optimistic and keen on putting their capital to work.

As 2023 winds down and 2024 is getting closer and closer, I'm unraveling my expectations. For this year, politics will dominate the news. Since I know myself, I have loved following politics, and I don't remember having a year like the one coming up. The US presidential campaign will dominate the year, culminating with the election on November 5th. The campaign will pressure geopolitical situations, like the war in Ukraine and the Middle East, not forgetting about tensions between the US and China and the threat of China invading Taiwan in 2025. We are still determining what impacts those events will have on our economy, inflation, or other financials of people and our companies.

The above are the most significant variables for the year. Of course, I always hope politics does not derail our industry. There are a few trends I expect to reveal in PE markets over the following year.

No one has a crystal ball, but we should start seeing interest rates to go down

PCE inflation has to ease up for interest rates to go down. I expect that to happen closer to the middle of the year when we should be getting the beginning of our soft landing - real gross domestic product growth remains positive in year-over-year terms.

Those adjustments will culminate with a more generalized positive sentiment in public markets, continuing its historical high mark. Monetary policies have not been as catastrophic as many people expected, and we will see whether the Federal Reserve (or other central banks) can deliver on the expectations and smoothly deliver the so-called soft-landing.

Startup evaluations will continue its down trend

The nose dive flight in startup fundraising didn't reach the bottom in 2023. It might be higher now than in 2020 for Priced Seed and Series A. However, the latter will get into the red territory by the influence of other Series rounds. Overall, we must expect the same downturn in the median cash raised and the pre-money valuations. Even if we get ease in interest rates in the first quarters of 2024, more is needed to turn everything around "overnight."

Fundraising will be challenging in 2024, and I'm sure everybody agrees. To stand out, entrepreneurs must prove they can run 10X their product market fit strategy and are Venture Scalable.

The exit opportunities market is brewing

There are few other exit strategies for investors in private equity companies. However, I like to follow broader exit market sentiment by looking for two leading indicators: IPO and M&A market indicators. The larger those markets are, the more excitement/optimism they drive on investing funds because they'll see an exit opportunity for their investments.

If we look at historical data, there is a pattern in which we expect to see a new IPO window. Raising in stock pricing and drop in interest rates could push back up the IPO and M&A global markets:

There is a lot of excitement and expectation for several exits, with Fintech at the top of the pyramid. Will we finally see an IPO for the long-awaited companies? Stripe, Klarna, Armis, Circle, and Snyk are the ones we expect most.

On the M&A side, Global M&A spending tells us we won't get a recovery indicator for 2024. Interest rates may invert this downturn towards the end of 2024, but expecting a recovery is unrealistic. In a best-case scenario, we expect the volume of deals to be at the same level as 2023. But we must remember that interest rates are this high, and providing debt at these rates is not an incentive for acquisitions.

Venture Capitals will be forced to reinvent themselves

Since 2021, we have seen a so-called venture winter, and it has been pressuring the deployment of capital. Let's get real here: interest rates should be reduced significantly for GPs to have room to play with the expected returns for their LPs again. Until then, they have to deploy the capital cautiously.

90% of VCs worldwide still need to deliver the expected return to their LPs. Some of them are already looking at different strategies in their funding models and portfolio constitutions to protect their capital. PitchBook defines active investors as firms that invest in two or more startups during the year: In the US alone, over 2700 FEWER firms investing compared to last year! I wouldn't expect anything different for next year!

A quick note on the Chinese VC market, that will remain low compared to the average trend between 2014 and 2022. The geopolitical tension with the US and its restrictions on advanced technology investments in China will continue creating uncertainty for US linked general partners (GPs) and limited partners (LPs).

Insolvencies will continue to rise, which will be a happy time for Turnaround investors.

Turnaround investors are expected to increase capital flows to private companies, which are seen as more attractive multiples when compared with their peers.

In recent years, we saw a surge in the number of companies that filed for bankruptcy. Next year, we should expect the trend to remain the same. Very few markets are expected to have a recovery in 2024 based on the numbers.

In Europe, we expect turnaround investors to increase their scouting for companies with solid fundamentals and good multiples but face temporary challenges, offering the potential for high returns as these businesses recover and grow. This is good timing for them!

AI buzz will continue to grow, and AI companies will get pressured to generate cash flow.

In 2023, AI attracted most of the attention in technology. We shouldn't expect less in 2024. Other industries will leverage AI and push forward on the buzz, but Healthcare and Climate Tech will leverage AI the most.

For next year, AI companies will get pressured to drive better revenue multiples to justify insane valuations, and we see the industry discussing smaller models with better yields, breaking down competitive barriers.

The growing emphasis on health and wellness is getting another boost with AI. The aging population is a problem for Western countries, making it a prime investment target.

The focus on climate change and sustainability will pick up in 2024. Renewable energy is getting boosted by significant governmental incentives, and it's bringing along an increasingly attractive to private equity investors