HSBC Global Research Funding the Future Survey: Venture Capital and High-Growth Sectors"

The "HSBC Global Research Funding the Future Survey: Venture Capital and High-Growth Sectors" report from August 2024 provides an in-depth analysis of current trends in venture capital (VC) and high-growth sectors such as technology and healthcare. The survey, conducted between July 3 and July 24 2024 involved 200 market professionals managing a total of USD1.93 trillion in assets, with USD630 billion from private equity (PE) and VC investors.

This second edition follows the initial survey conducted in April 2024.

While 40% of VC investors expect market activity to pick up in the next quarter, this figure has decreased from 52% in April. However, a more extended outlook reveals optimism, with 75% of respondents anticipating increased activity over the next 12 months. Most investors (94%) expect fundraising conditions to either improve or remain stable, buoyed by expectations of lower interest rates, which positively impact fundraising trends. Notably, 59% of VC investors now have a more favourable outlook on public equities, although only 49% of listed investors share a bullish stance on private equities.

The financial sector, particularly the VC/IPO/PE ecosystem, is now benefiting from the interest rate environment, which has pivoted from being perceived as a headwind in April to the most significant tailwind in this survey. Both public and private investors in financials expect these rate changes to impact their investments more than in other sectors.

The survey indicates that more VC investors (63%, up from 52% in April) anticipate higher IPO activity in the coming year, particularly in sectors such as artificial intelligence (AI). A large percentage of VC investors (80%) plan to exit their investments in the coming year, with buyouts and trade sales as preferred avenues. European listings are gaining traction, with 24% of investors favouring them, up from 14% in April, though the US remains the preferred listing.

Technology: Both VC/PE and listed investors are highly interested in AI, cloud, data centres, and semiconductors, with these sectors benefiting due to their enabling role in AI development. Tech VC investors focus increasingly on early-stage investments, extending monetisation timelines. Lower interest rates are seen as advantageous for tech sectors, particularly data centres, electric vehicles (EVs), and semiconductors. However, both VC and listed investors perceive valuations in tech as a potential risk.

Healthcare: The healthcare sector continues to attract investment from both VC and listed investors. Biopharma, particularly oncology and metabolics, stands out for attracting significant capital flows. Investment considerations vary, with VC investors emphasizing technology as the primary driver while listed investors focus on growth potential. Although 54% of listed healthcare investors expect an increase in deal volumes over the next six months, 66% believe this will not result in a change in asset prices.

Ahead of the US elections in November 2024, investors are highly focused on trade policy, the Inflation Reduction Act (IRA), and VC regulations. Many anticipate increased tariffs following the elections, further shaping the investment landscape.

The competitive fundraising environment is prompting LPs to be more discerning in their commitments, leading to selective capital allocation. High-net-worth individuals and sovereign wealth funds have been the largest categories of LPs increasing funding in VC investments over the past 12 months, while pension funds have reduced their funding. Access to LPs and attracting new investors remain primary challenges for VC investors.

The "Funding the Future Survey" reveals a measured optimism among VC and high-growth sector investors. Despite more cautious outlook as investors grapple with ongoing economic and monetary uncertainties in the US, the longer-term view remains optimistic supported by anticipated interest rate cuts. Technology and healthcare remain key areas of focus, with specific subsectors like AI, cloud services, and biopharma receiving significant attention. Investors are also preparing for potential impacts from upcoming US elections, and they remain watchful of the evolving global economic landscape.