[Below is an excerpt from the Beacon quarterly LP report where we look at the macro conditions/trends of the private and public markets]

Greetings! We hope you had a productive Q1 and start to 2022!

As we have all seen by now, the much anticipated correction in the public markets is well underway with cloud-based companies driving the BVP Index down 50% from its peak in Q1/21. Few investment professionals were surprised by the correction, even fewer will admit it and none will not have, by now, a plan in place of how to weather it!

• Lifebit, solving drug discovery challenges for the pharma industry in an era of prolonged Covid-induced challenges and is likely to perform better in highly volatile markets.
• Crimson, which enjoys an inelastic and global demand for education
• Cognism and Zinklar, a new addition to the portfolio, which help enterprises defend and increase their precious revenue.
• Humanising Autonomy, a category-definer that, in the event the inflation is transitory, can return the entire fund.

We constructed our portfolio on the premise that such a correction would likely be with us during our first year in operation. As such, the portfolio includes assets with strong antifragile properties:

The first quarter of the year saw us levelling up as a team, strengthening our footprint in the VC market and setting up the foundations for our own scaling up.

Are the private markets decoupling from the public ones or are they following suit?

Capital markets are currently experiencing the longest extended period of high volatility since the 2008 financial crisis. Having weathered Covid, the markets now have a smorgasbord of issues to tackle: geo-political tension, war in Europe, slowing GDP growth and high inflation. European markets are down 17% and the US S&P 500 18% from their 2021 highs. Tech focused hedge funds like Tiger Global saw the value of their holdings tumbling by 34% in Q1, and the bellwether of the innovation economy, ARKK, dropped 60% from its peak.

The turbulence in the public markets is trickling down into private markets though not (yet) everywhere in the world. Global venture funding reached $160 billion in Q1/22, 7% higher than the same quarter last year but 13% lower than the $184 billion invested in Q4/21 — an all time record breaking quarter.

So, why does this matter to VC investors?

EU (incl. the UK) VC investment escaped — so far! — the global slowdown. European startups received $26.8 billion in VC funding during the quarter, an impressive 20% quarter-on-quarter increase, and up 33% from the same quarter last year. However, distributions to LPs have plummeted in Q1 as the IPO market has essentially closed.

As the valuation multiples (EV/Revenue) are tumbling in the public markets especially in tech stocks, so are the private market valuations. New, follow-on VC rounds will close at no or very low valuation uplifts to the previous rounds. The capital allocators (and investors like you) may be able to find more competitively priced opportunities in the public markets (see table below) and new funds — especially emerging managers like Beacon — may find it difficult to close their funds.

Some of these trends may take some time to materialise — there is more than $1 trillion in US private equity and venture capital dry powder, a near record level, looking for opportunities.

There is, however, little doubt that they will materialise in Q2/Q3 unless there is a reversal of fortune in the public markets. Indeed, PWC believes the outlook for equities is generally positive, expecting 4% increase in 2022) and/or inflation proves to be transitory.