Why the fates of PE and VC-backed companies may diverge in 2022

It’s still early days, but we’re already starting to see the beginnings of this playing out in the venture industry—with the amount of funding in decline, as well as some markdowns and budget trims. In the past two weeks alone, there’s been a sudden uptick in layoffs at venture-backed companies.

If you haven’t been paying attention, there’s a laundry list of rather daunting macroeconomic factors contributing to all of this: A war, still-high inflation, rising interest rates, and poorly-performing public markets. And all of this is coming off the back of supply chain bottlenecks and a tricky hiring market, where everyone from burger flippers, truck drivers, and tech engineers have been hard to recruit. 

So what about the private equity industry? All these macro factors are universal—but the next phase may look different for private equity-backed businesses than it will for VC-backed ones, according to Nevin Raj, COO of Grata, a New York-based search engine for dealmakers in the middle market (the middle market being businesses generating somewhere between $10 million to $1 billion in annual revenue).

To be sure, there has been a slowdown this year in the middle market, too. Deal activity is down 31% from February levels, according to Grata. But while venture capitalists are predicting that VC funding could dry up for a long time—particularly for businesses that aren’t yet turning a profit—Raj says a slowdown likely won’t last that long for PE-backed firms.

For one, private equity investors are dealing with a different demographic. While many VC-backed founders skew younger, PE firms are often buying or investing in businesses owned by baby boomers looking to retire and exit the business. Those succession planning pressures aren’t going anywhere: Baby boomers are expected to turn over $14 trillion of business value in the next five years.

Additionally, private equity firms tend to be less weighted in software and biotech—industries that are vulnerable right now, according to Raj. This means that there is less multiple compression and we should see less of an impact on deal supply. 

To compare 2022 to the last recession, in 2008, global private equity investors today have more dry powder than they did back then, according to Raj. They are also making smaller deals, such as add-ons or rollups. These deals require less leverage, so will make firms less sensitive to climbing interest rates than they were 14 years ago.

“Tech companies will take a hit; the market will pause for a quarter, maybe two,” Raj says. “But ultimately the middle market will bounce back quickly.”

This isn’t to say some of these PE-backed companies won’t struggle. It’s small businesses that tend to be more vulnerable in a recession, largely due to changes in consumer demand. 

Private equity has always made a name for itself in scooping up companies when they are in trouble. There’s long been a debate over whether PE-backed companies perform better or worse during a downturn. We’ll soon get a chance to see how it plays out in real time.

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- Perimeter 81, a Tel Aviv-based security service edge and zero trust network access provider, raised $100 million in Series C funding. B Capital led the round and was joined by investors including Insight Partners, Toba Capital, ION Crossover Ventures, Entrée Capital, and Spring Ventures. 

- AppOmni, a San Francisco-based SaaS security provider, raised $70 million in Series C funding. Thoma Bravo led the round and was joined by investors including Scale Venture Partners, Salesforce Ventures, ClearSky, and Costanoa Ventures. 

- Transition Bio, a Cambridge, Mass. and Cambridge, U.K.-based drug discovery platform company, raised $50 million in Series A funding. Northpond Ventures led the round and was joined by investors including Taiho Ventures, Bristol Myers Squibb, Magnetic Ventures, Lifeforce Capital, and other angels. 

- Watchmaker Genomics, a Boulder, Colo.-based DNA and RNA reading, writing, and editing life sciences company, raised $40 million in Series A funding. Decheng Capital led the round and was joined by Eclipse Ventures. 

- LatchBio, a San Francisco-based data storage and analysis provider for researchers, raised $28 million in Series A funding. Coatue and Lux Capital led the round and were joined by investors including Hummingbird Ventures, Caffeinated Capital, Haystack, and Fifty Years.

- Orange Health, a Bengaluru-based diagnostic and pathology lab, raised $25 million in Series B funding. Bertelsmann India and General Catalyst led the round and were joined by investors including Accel, Y Combinator, Good Capital, and Uncorrelated Capital. 

- Opal, a New York and San Francisco-based access management security platform, raised $10 million in Series A funding led by Greylock. 

- Prometheus Materials, a Boulder, Colo.-based zero-carbon building materials provider, raised $8 million in Series A funding. Sofinnova Partners led the round and was joined by investors including Microsoft Climate Innovation Fund, Skidmore, Owings & Merrill, GAF, and The Autodesk Foundation.  

- Dework, a Stockholm-based recruiting and task management company, raised $5 million in seed funding led by Paradigm.

- Realworld, a New York-based lifestyle platform for adulthood, raised $3.2 million in funding. Fitz Gate Ventures led the round and was joined by investors including TTV Capital, Bezos Expeditions, Techstars, Knightsgate, The Helm and other angels.  

PRIVATE EQUITY

- Accrete Health Partners, backed by Silversmith Capital Partners, acquired Nordic Consulting Partners, a Madison, Wis.-based health and technology consulting firm. Financial terms were not disclosed.

- H.I.G. Capital acquired EYSA Group, a Madrid-based smart mobility solutions provider. Financial terms were not disclosed. 

EXITS

- Bain Capital Private Equity acquired VXI Global Solutions, a Los Angeles-based customer care solutions provider, from Carlyle. Financial terms were not disclosed. 

- CRH agreed to acquire Barrette Outdoor Living, a Middleburg Heights, Ohio-based residential fencing and railing products maker, from TorQuest Partners, for $1.9 billion.

OTHER

-  Bristol Myers Squibb agreed to acquire Turning Point Therapeutics, a San Diego-based pharmaceutical drug developer, for $4.1 billion. 

IPOS 

- Intuity Medical, a Fremont, Calif.-based automated self-contained blood glucose monitor developer, withdrew its plans for an initial public offering at $75 million. 

FUNDS + FUNDS OF FUNDS

- Ten Eleven Ventures, a Burlingame, Calif.-based investment firm, raised $600 million for a fund focused on seed to growth stage security companies.