Prediction
Growth in median fund size will decelerate
Rationale
Positive net cash flows to LPs and manager consolidation have kept capital flowing to larger funds in recent years. Additionally, new entrants in VC have pressured fund managers to aggregate more capital to remain competitive. But in order to maintain venture-like returns and encourage efficiency among startups, GPs may refrain from raising excess capital in the coming years. As a result, we expect fund sizes may begin to level off and the growth of median fund size will decelerate.
Caveat
A growing appetite among LPs for private market funds could challenge this prediction. PitchBook’s 2018 Annual US Institutional Investors Survey indicates that LPs still have a considerable interest in the private markets. Additionally, a number of unicorns are poised to IPO in 2019, which could also help GPs secure outsized fundraises for multiple years to come.
Senior Strategist James Gelfer sits down to help us better understand the complexities that Institutional Investors are facing in today’s market.
Background
In 2018, median fund size skyrocketed up to $80 million (way up from a fairly consistent yearly average of around $40 to $50 million over the last five years). This was propelled in part by ever-rising deal sizes and valuations across stages. Further, non-traditional investors are becoming increasingly involved in the private markets, which has pushed GPs to ask for more money.
Case study
Benchmark Capital is a notable VC that emphasizes efficiency, operating especially lean in order to maximize returns. Even with a history of successful early investments in some of the industry’s most valuable unicorns including Uber, WeWork and Instagram, the firm maintains the importance of remaining disciplined when it comes to capital. You can see from their Benchmark Capital Partners fund series that they take consistency seriously. They’ve even gone on record to say that they don’t have plans to change in the near future.
Conclusion
Despite 2018’s significant jump in median fund size, growth will likely decelerate as GPs look to maintain strong returns and operate efficiently.
Get more insight into 2019’s major VC trends with our 2019 VC Outlook report.