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11 big things: Pandemic chaos could shake up VC & PE

Our experts’ pandemic prognosis for the private markets joins WeWork wranglings, pharma drama, a Costco takeover and more in our recap of the week.

We’re only two decades in, I suppose. But so far, March is shaping up to be the most miserable month of the millennium.

The novel coronavirus continues to spread around the globe, leading to more illnesses and deaths, more large-scale shutdowns, more lost jobs, and a growing sense of dread that the horror isn’t going to end anytime soon. The global outbreak also continues to rattle the financial markets. Stocks are tumbling. Deals are crumbling. And investors are trying to make sense of an unprecedented set of circumstances.

This week, some of PitchBook’s sharpest minds put on their thinking caps and tried to do the same.

Our analyst team has answers to some of the pressing questions venture capitalists and private equity firms are asking. And that’s one of 11 things you need to know from the past week:

Not every curve can be flattened. (Andriy Onufriyenko/Moment/Getty Images)

1. The pandemic prognosis

Some of our most senior analysts have pooled their collective expertise to publish a new note examining what the impact of COVID-19 might be on the private markets. The whole thing is certainly worth a read. In the meantime, I’ll try to offer some bite-sized summaries of the note’s biggest predictions and takeaways.

For VCs, the outbreak could exacerbate a trend that began with the WeWork debacle last fall. Our analysts write that “deal terms appear to have shifted in favor of investors,” pushing back against the twin trends of founder-friendliness and blitzscaling that, in recent years, combined to put much of the power in the hands of startups.

Now, VCs are emphasizing sustainable growth and profitability. Funding could dry up for startups that can’t adapt.

Dealmaking in PE will “undoubtedly” decline, our analysts say, even if the proof might not show up in the pudding for another month or two. That’s in part a symptom of the general correlation between buyout activity and overall economic health, and in part because debt financing could now be much tougher to come by.

As of the end of last year, more than 75% of PE deals came with debt-to-EBITDA multiples of more than 6x, compared to just 25% at the end of the financial crisis, according to a recent Bain & Company report. That recipe is going to change. Considering the rapid rise of private debt funds and the industry’s vast heap of dry powder, deal financing likely won’t dry up the same way it did during the last crisis. But effects will still be felt.

One type of private equity deal could become more common: investments in distressed assets. If a lack of debt funding leads to a spike in bankruptcies and other financial woes, firms could shift their strategies to take full advantage of these so-called special situations.

Across VC and PE, a drop in exits seems likely. Stock market turmoil will cause startups planning an IPO to face a chilly reception. And firms may well be loathe to part with prime assets when valuations are depressed.

Plummeting asset prices could have the knock-on effect of driving down LP commitments to VC and PE funds, as institutions strive to maintain their preferred balance of public vs. private assets. Many LPs are currently under-allocated to the private markets, though, which means the impact may not be as severe as it was in 2008, when investors as a whole were over-committed to alternatives.

If there is a decline in fundraising, our analysts think it likely smaller firms will be hardest hit. For PE, this could mean the further consolidation of capital in mega-firms at the expense of smaller investors, a trend that’s already been building in recent years. With less capital to spread around, LPs will likely focus on the managers who have provided consistent returns in the past.

And what about those returns? The one-year rolling horizon IRRs of VC and PE vehicles have been trending down in recent quarters, according to PitchBook’s latest Global Fund Performance Report, and that seems likely to continue. Yet research shows that private markets tend to be less volatile than the stock market (although plenty of debate remains about whether the illiquidity of private markets is a feature or a bug), so our analysts expect private funds to widen their performance gap over public assets.

PitchBook data shows that funds raised immediately before a downturn tend to underperform, while funds that begin investing at the market’s low point tend to perform best. That might not bode well for funds that started deploying capital between 2017 and 2019.

Beyond dealmaking and fundraising, our analysts also hypothesized about what the current situation will mean for companies focused on remote services. Already, offerings like ghost kitchens and telehealth consultations were growing more common. Now, their acceptance into the mainstream could be accelerated. The same could happen for remote work if companies are pleased with the results of a months-long forced experiment.

There’s much more on a potential remote revolution and plenty of other analysis in the full note, which comes with my highest recommendation. Here’s one more link. You can also catch up on the rest of our coronavirus coverage right here. Now, let’s get onto the other news of the week.

2. Blurry Vision

SoftBank is reportedly seeking $10 billion in new funding for its original Vision Fund, in part to aid portfolio companies hit hard by the coronavirus. One such company seems to be OneWeb, the well-funded developer of a network of internet satellites: Too little cash and too much competition could be driving the business toward bankruptcy, Bloomberg reported this week. Meanwhile, in separate news, SoftBank is said to be reconsidering plans to buy $3 billion worth of WeWork shares as part of its would-be bailout of the co-working company.

3. Pharma drama

German biotech company CureVac and its attempts to create a COVID-19 vaccine were at the center of an international firestorm this week. Ultimately, the company received a pledge of up to €80 million (about $86 million) from the EU, but not before being forced to deny earlier reports that the US government had inquired about a takeover of CureVac. Another European company, Curium Pharma, will remain under the ownership of CapVest for at least a while longer, as the UK firm called off an auction of the French company this week after market volatility led to shrinking bids, according to Bloomberg.

4. Remote control

Several startups that could capitalize on social distancing raised VC funding this week. UserTesting, which helps companies conduct virtual focus groups to gain customer feedback, banked $100 million. Honorlock, a developer of online test-proctoring software, inked $11.5 million for its Series A. And Around gathered $5.2 million for its Zoom-style software for workplace video calls.

5. Bulk buying

The company that made bulk buying a lifestyle, Costco, announced this week that it had paid $1 billion to acquire the Innovel Solutions logistics business from Transform Holdco, which owns several billion dollars’ worth of former Sears assets. Another name at the top of its industry is planning plentiful purchases of its own, as reports emerged indicating Sequoia is aiming to raise some $7 billion for a group of new funds focused on the US, China and India.

Costco's takeover comes as its stores have never been busier. (Justin Sullivan/Getty Images North America)

6. Business as usual

Several startups announced new nine-figure fundings this week, global crisis or not. Gojek has reportedly collected another $1.2 billion for its Indonesian super app. DevOps specialist HashiCorp hauled in $175 million at a valuation north of $5 billion, confirming an earlier PitchBook report of the new funding. Bakkt grabbed $300 million in new capital for its crypto platform. And mobile game developer Scopely secured a fresh $200 million for its Series D.

7. The future of food

Actually, you can add one more name to the above list: Impossible Foods, which opened the week by unveiling $500 million in new funding. In other food news, it was a wild week at Blue Apron. Between Monday morning and Thursday morning, the company’s stock price increased by more than 10x amid investor optimism that self-distancing measures could lead to a customer surge. Blue Apron’s share price declined about 30% Friday, giving away a large chunk of those gains, but its stock is still in much better shape today than it was seven days ago.

8. Ridehailing rollercoasters

Recent unicorns Uber and Lyft also spent much of the week riding the market’s ups and downs. Uber’s stock ended the week pretty much where it began, at around $20 or $21 per share. But in between, it dipped to below $15 per share and up above $23.50 per share, as investors grappled with what a pandemic will mean for mobility. It was a similar story for rival Lyft, which saw its stock decline by more than 25% between Monday morning and Wednesday afternoon before a surge of more than 45% by the week’s end.

9. Airbnb alert

Last year, Airbnb declared it would go public in 2020. But the coronavirus outbreak seems to have caused a reconsideration of those plans, with The Wall Street Journal reporting this week the company’s board and investors are now divided on the best path forward. Multiple reports emerged this week indicating the company, last valued by VCs at $31 billion, is fielding interest from investors about raising new funding.

10. Deal or no deal

That was the name of the game this week for KKR. On Wednesday, the firm announced plans to buy recycling business Viridor for nearly $5 billion, one of the biggest buyouts announced in recent weeks. On Thursday, KKR’s hopes to acquire hybrid arcade/restaurant operator Dave & Buster’s took a hit, as the company adopted a poison pill provision in a bid to both combat a possible takeover and save its rapidly deteriorating stock price.

11. Date night

No leaving the house? No problem. A dating app company called (creatively enough) announced plans this week for a $50 million corporate venture fund, capital that founder Dmitry Volkov told TechCrunch will go in part toward companies developing social distancing-friendly offerings like video dating and online chat. After all, as Rihanna once taught us, you can still find love in a hopeless place.

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    Written by Kevin Dowd

    Kevin Dowd wrote The Weekend Pitch newsletter for PitchBook, covering startups, buyouts and the rest of the private market.

    A native of the Pacific Northwest, he’s an alumnus of the University of Washington with a degree in creative writing and journalism. He enjoys books and basketball and, most especially, books about basketball. He feels uncomfortable writing about himself in the third person.

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