More exits for VCs projected in 2025, despite Asia challenges

Venture capital (VC) fund managers expect improved exit opportunities in 2025, with 62% anticipating increased activity, according to a report by Preqin last week.

The 75 basis-point cut to US interest rates over September and November is expected to boost the exit environment, particularly for trade sales and IPOs.

By the first quarter of 2024, venture capital assets under management (AUM) reached $3.1 trillion, with the Asia-Pacific region (APAC) accounting for $1.6 trillion, followed by North America at $1.1 trillion, and Europe at $200 billion.

However, distributions lagged behind limited partners' needs, with global exits totaling 852 and an aggregate value of $112 billion by the third quarter of 2024, continuing the downward trend from 2023.

While the total number of VC deals reached 14,056 by the end of third quarter of this year, with an aggregate value of $201 billion, this suggests 2024 will underperform compared to 2023. Nonetheless, sectors such as artificial intelligence, cloud computing, fintech, and clean tech have shown resilience.

IT and healthcare, which usually dominate VC deal flow, are expected to record similar aggregate deal values to last year, despite current declines. IT stands at $90.2 billion compared to $127.3 billion in 2023, and healthcare at $37.8 billion versus $48.8 billion.

Asia experienced the most significant decline in deal activity, with exits dropping from 369 to 128 and their value plummeting to $4.6 billion from $38 billion.

Fundraising and Demographics

The decrease in profitable exits has resulted in less capital being returned to limited partners and reduced capital available for new funds.

During the first three quarters of 2024, 800 funds raised a total of $84.8 billion, down from 1,645 funds and $135.9 billion in 2023. Larger funds attracted most of the capital as smaller funds struggled to close.

The reduction in new managers, who typically raise smaller funds, contributed to this concentration. First-time managers raised just $4.62 billion across 106 closed funds in the first nine months of 2024, a 77% decline.

“We have seen Asian deals activity fall off as exits suffered in 2024 and fundraising remained particularly weak for the Asia region in 2024,” Michael Patterson, senior associate, research insights at Preqin, told AsianInvestor.

Despite this, Patterson is optimistic about the future, citing the region’s young, tech-savvy population as a potential opportunity for managers.

Michael Patterson

Preqin

Adaptation Strategies

The dramatic drop in Asian exits necessitates that general partners adapt their exit strategies.

Patterson suggests that general partners may need to hold onto deals longer and explore alternative liquidity pathways.

"Secondaries have been playing a larger role as limited partners look to reposition portfolio holdings as well as general partners, who may need to access liquidity, given the exits in Asia remain weaker in 2024," he noted.

Commenting on how other emerging VC markets can overcome challenges of a fragmented market across multiple jurisdiction, Patterson said: “Having partners who hold expertise and experience navigating the local market is key to overcoming challenges and gaining access to deals.”

Promising Markets

Both investors and fund managers now view India as the most promising market, having overtaken China in 2022. Despite a decade of solid growth in venture capital raised by India-based managers, the market remains smaller compared to China.

South-East Asia continues to be the second most favoured region, with interest levels at 30% and 35% respectively among participants in the survey.

The Middle East attracts 25% interest from fund managers but remains under the radar for investors at 9%.