Venture capitalists — the folks who place dollars in emerging companies — are finding a good amount of fresh capital of their own. Money to venture capital funds hit a post dot-com era high in 2016 as 328 funds raised $51.3 billion, surpassing the 2008 totals when 344 funds raised $47.5 billion, according to a new report Pitchbook released Thursday.
Meanwhile, private equity fundraising inched up by 2.6 percent in 2016, with 356 funds raising $268.5 billion.
As more money flows, the funds’ cash reserves, known in industry parlance as “dry powder,” is also increasing. Global “dry powder” hit a record high last year in both areas, with private equity recording $754 billion and venture capital posting $121.4 billion.
That could fuel more deal activity, especially in private equity markets.
“These vast reserves of capital will help to fuel PE deal flow this year and next,” Pitchbook wrote in its PE & VC Fundraising Report. “Despite the high multiples in the market, and subsequent difficulty managers are having penciling out returns, PE firms will be under pressure to deploy capital quickly. Given those lofty prices, however, as well as lower levels of leverage being used across the market, it will become harder to produce the returns to which many PE investors have become accustomed.”
As to the $121 billion in cash reserves in the venture capital ranks, Pitchbook notes that the record levels of “dry powder” “will certainly help support the capital needs of up and coming companies” even as investors “have become more stringent with their analysis before deploying capital.”
Continuing an ongoing trend, the big funds in private equity and venture capital just keep getting bigger.
Thirteen private equity funds raised a total of $103.1 billion last year, accounting for 38.4 percent of all commitments for private equity. For comparison, “mega-funds” accounted for just 30.7 percent of markets in 2015.
That trend was consistent in venture funds as well. According to the report, more VC funds closed on more than $100 million in commitments in 2016 than any year in the last decade, accounting for 90 percent of all venture capital fundraising. Twenty-eight of those funds were larger than $500 million. TCV IX, a venture capital firm, led the charge with a $2.5 billion closure.
“Over the past few years, we have seen deal sizes grow almost continuously, with median deal sizes at or near decade highs at every stage,” the report reads. “Companies have also stayed private longer, increasing the amount of capital needed for many to achieve an exit.”
Much of this growth has been abroad, as well. While private equity commitments were up globally, they fell by 8.9 percent in the United States last year. Canada, however, saw a 40.7 percent increase and Europe saw a 34.6 percent increase. But, Pitchbook notes in the report that increased globalization has made it harder to pinpoint private equity funds to a single region.
While 2016 saw record dollars in terms of cash flowing to venture capital funds, Pitchbook predicted this will likely slow going forward. With more money, investors can be more selective where they’re choosing to invest. Pitchbook wrote:
Investors have become more selective with the deals they pursue and thus, the pace capital is being deployed has slowed. The robust net cash flows LPs have seen in recent years have also started to taper off as we’ve seen VC-backed exits decline in recent quarters. Moving forward, the aforementioned factors will likely lead to a slower fundraising market, an outcome we view as healthy given the current state of the market.