Inflation and tighter monetary policy have made capital deployment more difficult, noted Pitchbook’s , published on 18 April 2023. Moreover, the stability of the financial system and the robustness of regulations have come under additional scrutiny recently, and the issues that are faced by the financial services industry are expected to have effects on the fintech scene as well, said the report.

“Challenges from 2022 have persisted in Q1 2023 and we are now seeing declines in activity across the VC ecosystem. Growth has been harder to capture across major European nations as inflation and monetary policy have stifled capital deployment,” said Nalin Patel, lead analyst, EMEA private capital and author of Pitchbook’s European VC report. “Pandemic-induced hiring sprees have exacerbated the need to reduce costs and improve margins for VC-backed companies.”

European venture capital exit activity deteriorated and exits via mergers and acquisitions were the “preferred route” in the first quarter of the year. Finally, European VC fundraising is on track for the lowest annual figure since 2015, said the report, adding that “Q1 2023 reflected the first substantial decline” from the rhythm of the last several years.

“The challenging macroeconomic landscape in major VC clusters such as the UK, France, and Germany, combined with heavy investment in recent years, has created a tough situation for several businesses across sectors. We expect activity to remain muted in the near-term until inflation dips, growth picks up, and monetary policy loosens,” said Patel.

Here are some key takeaways from the two reports.

VC deal value fell 32.1% quarter-over-quarter

In the first quarter of 2023, venture capital deal value in Europe fell 32.1% quarter-over-quarter to reach €11.8bn, while deal count fell 19.2% to reach 2,748. Many large multi-national companies, such as Alphabet, Amazon and Meta, announced layoffs during the beginning of the year due to difficult economic conditions. Pitchbook anticipates seeing “further layoffs across mature businesses in the VC ecosystem in the near term.”

Concerns for fintechs in Europe

Fintechs are a major driver of venture capital activity in Europe. In 2022, for example, 1,657 of the 13,609 deals that took place--about 12%--were in the fintech sector. In comparison, in 2013, 284 of the 5,190 venture capital deals that occurred (5.5%) were in the fintech sector.

The March 2023 , Signature Bank and Silvergate Bank, and , have called into question the stability of the financial system and drawn additional attention to banking regulation, noted the report. Problems facing established players in the industry are likely to have “knock-on effects for the fintech VC scene,” said the report. “Signs of stress for large institutions will affect sentiment towards the subsector.”

Opportunities in the energy sector

Pitchbook noted that VC deal activity is down and there are challenges in “popular” venture capital industries such as financial services and IT. On the other hand, however, opportunities exist in other areas, such as the energy sector.

Historically speaking, energy has not drawn a lot of attention in the VC sector. Only 4.6% of capital in the first quarter of 2023 was invested in the energy sector, said the report, but climate-related targets in Europe and the desire to make the industry more efficient in the long-term are providing opportunities. “We believe deal activity in the clean energy subsector will continue to grow as renewable energy sources are developed globally.”

Deal value in the energy sector has increased from €300m in 2012 to €4.8bn in 2021. It dropped to €2.9bn in 2022, and in the first quarter of 2023, amounted to €500m.

Nontraditional investors and strategic opportunities

Nontraditional investors are those that are not primarily categorised as VC investors, such as investment banks, private equity firms, sovereign wealth funds, hedge funds and pension funds. Venture capital deal value with nontraditional investor participation reached €8.0bn in Q1 2023, noted the report, which is on track to be the lowest total since 2018. Pitchbook expects VC deal activity that involve nontraditional investors to reflect wider trends in the VC ecosystem.

That being said, “strategic partnerships” are becoming more common between startups and nontraditional investors, noted Pitchbook, citing a 2021 partnership between Fidelity International and German private equity investment platform Moonfare. As a result of this agreement, Moonfare provides access to private market funds for Fidelity’s clients, while Fidelity provides investment and has a seat on Moonfare’s advisory board.

Zoom on private equity

The macroeconomic environment’s impact on the private equity industry has started to become more evident, said a separate published on 20 April, as demonstrated by the fact that European private equity dealmaking slowed in Q1 2023.

With the continued increase in increase rates--which in turn implies increased borrowing costs--there is a lower tendency to pay high multiples for a business. Purchase price multiples for leveraged buyouts (LBOs) are thus contracting.

“It is somewhat reassuring to finally see the macroeconomic headwinds impact private equity. The lag often associated with private markets is being showcased with the lower deal and exit value in Q1 data,” said Nicolas Moura, EMEA private capital research analyst and author of Pitchbook’s private equity report. “We have seen a contracting in purchase price multiples for LBOs as interest rates continue rising, leverage becomes costlier, and sponsors are forced to focus their energy on fundamentals and balance sheet restructuring.”

€182.8bn in deal value in first quarter

Private equity dealmaking in Europe, which peaked in Q2 of last year, dropped to €182.8bn in Q1 of 2023, said Pitchbook, and was down 8.7% quarter-on-quarter.

European private equity exit activity has fallen from the highs seen in 2021 and 2022, said the report. The first quarter of 2023 saw €70.7bn worth of exits, in line with the previous quarter and down 12.0% year-on-year. Most were driven by corporate acquisitions instead of public listings and buyouts.

However, European private equity fundraising accelerated in Q1 and is on track to be higher than in 2022, which is a “signal of confidence to private markets.”

PE fundraising up to €26.4bn

European private equity fundraising increased in the beginning of 2023, raising €26.4bn, said Pitchbook. Large funds accounted for the bulk of fundraises. The median fund size has remained stable over the last four years (around the €200m mark), noted the report, but the average fund size has doubled from €717.7m to €1.8bn.

Higher interest rates, the resulting higher borrowing costs, and the denominator effect have all impacted limited partners (LPs) and how they choose their general partners (GPs) and the commitments they may offer, said the report. “This has resulted in a fundraising horizon beneficial to experienced fund houses and a hostile environment for first-time managers with no prior track records,” said Pitchbook, which expects this trend to persist in 2023.

Energy sector appears promising

As mentioned by Pitchbook’s venture report, the energy sector and the green transition are opening up new opportunities. Their private equity report found that five out of the top 20 deals in 2023 were related to cleantech.

These companies are active in the renewable energy sector. Some of their activities include connecting solar farms to electric vehicle charging units, expanding EV charging points, or solar energy production plants.

“PE players are well-placed to become industry experts and help advance the technology in these areas whilst also making full use of the various government subsidies that are often associated with these industries.”

Luxembourg fund among closed funds in 2023

“With a focus on fundamentals and established track records, we have seen the majority of funds raised this quarter--about 14 out of 16--come from traditional buyout funds. In periods of uncertainty, we see the familiarity bias prevail, as investors are far more likely to commit to GPs they are familiar with,” said Pitchbook’s report.

One of the 16 funds that closed in the first quarter of 2023--Summit Partners Europe Growth Equity Fund IV--has its headquarters in Luxembourg.

Summit Partners is a global alternative investment firm, and with their new fund, they plan to target minority and majority equity investments between €20m and €80m in Europe-based companies, said a press release published by the company at the close of their fund in February 2023. Their support focuses on areas such as human capital, go-to-market and operations, technology and data science, and capital markets.

Find Pitchbook’s full Q1 2023 European venture report  and the full Q1 European private equity breakdown report .