Although venture capital is the asset class most exposed to the current market turmoil, 2023 may prove a solid vintage for performance, Preqin Global Report 2023 revealed on Wednesday.

According to the report, given that the hit to public equity valuations has impacted private markets too, there could be opportunities to put capital to work and take advantage of the fall in valuations witnessed during 2022.

The report showed that entry valuations have reduced significantly and competition for deals has softened.

It noted that aggregate deal values ($346.3 billion) across the asset class in the period to the end of the third quarter of 2022 are just 51 percent of those completed in 2021 ($685.1 billion), as more managers hold off on capital deployment.

Meanwhile, at the end of the third quarter of 2022, venture capital managers had $530.8 billion of dry powder to deploy into the market, an increase of 40.7 percent compared to December 2021.

According to Preqin data, global venture capital assets under management (AUM) reached $2.45 trillion in March 2022, up from $2.23 trillion in December 2021.

Over the next five years, Preqin predicts a slowdown in global venture capital performance and fundraising relative to the past few years.

That said, the asset class is still expected to see significant growth in total AUM, compared to other asset classes within alternatives.

The report also found that a strong market for venture capital fundraising has helped boost AUM growth across the asset class.

It noted that aggregate capital raised increased from $102.8 billion in 2015 to reach $221.4 billion at the end of 2021.

It is also noted that by the end of the third quarter of 2022, venture capital funds raised $162.5 billion – equal to 73 percent of the full year total in 2021.

The report also found that first-time fund managers face more challenges, while early stage and venture debt strategies are increasingly favored.

According to the report, allocators have more choice than ever when it comes to investing into the space.

Preqin data shows that there are currently 5,048 venture capital funds in the market globally, targeting $400 billion in capital, as of the third quarter of 2022.

Most of the capital raised is going into larger funds, which have raised 26 percent of aggregate capital for the year to the third quarter of 2022.

Preqin also found that 73 percent of aggregate funds raised up to the end of the third quarter of 2022 were completed by established managers, i.e., managers raising their fourth or greater fund, the highest number over the last decade.

In response to the shifting market, it said fund managers may turn away from focusing on niche sectors and move towards sector agnostic investments, as pricing across venture capital diverges.

According to Preqin data, early stage is becoming more favored, as this area may weather the storm better than other strategies, with longer incubation periods providing a longer runway until the exit environment picks up again.

This trend is reflected in funds in market, with early stage and venture debt seeing the largest proportional gains in funds coming to market, increasing by 33.7 percent and 35.1 percent, respectively, with 2,157 and 77 funds in market as of the third quarter of 2022.

“For capital deployed in the last two years, performance will most likely take a hit in comparison to returns seen in the previous couple of years. However, while 2023 is not without risks, some managers will be eager to put capital to work,” said Cameron Joyce SVP, Research Insights at Preqin.

“As lower multiples filter through from public to private markets, we will see fund managers taking advantage of this to buy into promising companies at more favorable terms,” he added.

Preqin Global Report 2023: Venture Capital – key figures:

Venture capital performance: Venture capital performance reached a median net internal rate of return (IRR) of 22.7 percent for vintages of 2009-2019.

Dry powder: As of end of Q3 2022, venture capital fund managers sit on $530.8bn of dry powder. This is forecasted to increase to $659.1 billion by the end of 2027.

Venture capital assets under management: Venture capital AUM globally reached 2.45 trillion in March 2022, up from 2.23 trillion in December 2021.

Funds in market: There are currently 5,048 venture capital funds in the market globally that are targeting $400 billion in capital.

Fundraising: The largest ten funds in venture capital raised 26 percent of aggregate capital, while 73 percent of aggregate funds raised were by established managers in 2022.

86 percent of investors plan to invest the same or more in private capital over next 12 months, says Preqin