November Private Markets Intelligence

Numbers

FOMO Alert: VCs love AI, while other sectors feel the squeeze

• AI FOMO is real, even though the broader VC funding environment remains gloomy. Investors’ fear of missing out on the next tech giant has driven nine $1B+ equity rounds in AI this year, while overall VC dollars decreased 20% QoQ in Q3 and deal count is also down considerably.(1)

• Non-AI startups are struggling to secure funding. Many are pushing out bridge rounds to extend runway and stay afloat. The percentage of flat and down rounds has reached the highest point in a decade, accounting for a combined 27.4% of all VC deals.(2)

• AI is gobbling up the available dollars. The share of VC investment in AI more than doubled to 28% in 2023 (3), the year ChatGPT dazzled the world and Microsoft bet $10 billion on OpenAI. The trend continues in 2024, with 33% of all VC capital directed toward AI as of September 30th.(3)

• Not surprisingly, AI valuations are hefty and revenue multiples above 20x are commonplace in the sector.(4) For comparison, the median Fintech revenue multiple as of Q3 2024 was 4.8x (5). The high valuations in AI extend beyond generative AI companies to the industry’s providers that deliver services such as data labeling and model fine-tuning.

(1) CB Insights
(2) Pitchbook
(3) Crunchbase, EY
(4) Aventis
(5) First Page Sage

Spotlights

Shopping for carbon credits?

• The carbon credits market is projected to grow at a 39% CAGR over the next five years and reach $4.7T by 2030.(1) The market is mainly driven by companies seeking to comply with greenhouse gas emissions regulations (“compliance market”), but a growing portion is voluntary and driven by corporate net-zero pledges (“voluntary market”).

• Not all carbon credits are made equal. Credits deemed to be high-quality command premium pricing and tend to have the following qualities: additional positive environmental, social or economic outcomes (“co-benefits”); long-lasting carbon sequestration (“high permanence”); and certifications such as the Core Carbon Principles.(2)
• Carbon credits also come with a risk profile. The risks of project failure, impermanence of its positive effects, and fraud can weigh heavily on a credit’s market value. For example, carbon capture projects are technically complex and at high risk of project failure and the permanence of reforestation projects can be quickly impacted by a wildfire. Additionally, data manipulation and false reporting are real issues, placing a premium on credits that are validated, monitored, and verified through leading certifications.(3, 4)

(1) Grandview Research
(2) Integrity Council for the Voluntary Carbon Market
(3) Verra
(4) PSU
(5) S&P Global

ESG Investing: Hot or Not?

ESG investing has been a hot topic across asset classes for a number of years now. We took a dive into Pitchbook’s Sustainable Investment Survey(1) to see where things stand in the space. Has some of ESG’s shine dulled as the novelty wears off? Are investments in this space destined to be concessionary philanthropic endeavors, or have ESG considerations brought valuable scrutiny to important risks? Investors’ answers to the survey lend some insight into how these market participants practice (or do not practice) ESG investing.

ESG’s critics are vocal

• Over 60% of survey respondents agreed with the concern that “ESG is mostly baseless virtue signaling.” As the market has been plagued by discussions of issues like green washing, it appears that investors are struggling to identify ESG investments that can create concrete, measurable outcomes.
• Nearly 40% of respondents cited concerns about “breach of fiduciary duty.” In an industry with high legal and ethical standards around acting in clients’ best interests, investors without ESG-specific mandates are at best uncomfortable with the notion of sacrificing returns for ESG goals.
• Lack of standardization is another challenge cited by about 35% of respondents. Without clear, uniform goals and measurements of success, ESG is difficult to successfully implement.

Assessing the value of ESG

• The primary motivation cited by ESG practitioners was “alignment of organizational mission/values and investment practices.” These are, presumably, organizations with ESG-related goals that seek to implement those as part of an investment strategy.
• Another notable benefit of ESG comes from ensuring that “material nonfinancial risks are identified so that they may be mitigated.” This argument stands in opposition to the notion that ESG considerations must by definition decrease returns. Many survey respondents cited the value of these criteria in performing a thorough assessment of risks, particularly nonfinancial ones.

Where can ESG best be implemented

• ESG-oriented strategies are most concentrated in private markets- in particular, private equity and venture capital. This data runs contrary to some broader impressions that public markets investors represent a majority of ESG practitioners.
• ESG is a good fit for private markets because of the depth of relationships between investors and portfolio companies, as well as the timeframe of these investments. Many investors spend years-long holding periods deeply involved in decision making for these businesses, creating unique opportunities to enact and promote ESG goals.

While the ESG space continues to evolve and has faced its share of criticism, it appears that the impact of this new way of approaching investing will be long lasting.

(1) Pitchbook 2024 Sustainable Investment Survey