2024 – What’s Ahead?

Navigating 2024’s financial landscape involves addressing interest rates, private market challenges, fundraising hurdles, regulatory shifts, and the evolving crypto landscape, offering insights into the year ahead for investors.

‍Interest rates and global uncertainty

They’re up, they’re down, they’re all around. The interest rate prophecy is constant news, and while the latest tea leaf readings portend an early summer 2024 rate cut, this is far from etched in stone.  

Timing aside, it’s still very much TBD on what exactly rate cuts will actually do for markets broadly and privates more specifically. Certain investments will immediately fall out of favor leaving cash to be deployed, but at the same time we would expect a large amount of capital to remain locked in mid-term T-bills for several years out in many cases. The overall consensus and our hope is to see investors move off the side-lines later in the year and back into the private arena at both fund and direct investment levels. 

We would be remiss to ignore that geopolitical instability has been a constant since or even before the pandemic, with the rise of populism across nations and wars arising in more parts of the world. While we hope for peace and de-escalation across the map, we do recognize this instability and the likely impending change in many international business relationships (ex. US + China). For the moment there seem to be some short term winners (ex. nearshoring, US + Mexico), and it remains to be seen where the next international growth markets will emerge.

Private markets have some work to do to gain favor again

2023 was a rough year for venture capital and private equity, marked by multi-year lows in dealmaking, funding round sizes, and valuations, despite record levels of dry powder going into the year. While all stages were impacted, there was some salvation in the early stage where valuations remained the strongest (Carta). Across the board, investors are placing added scrutiny on company fundamentals, positive unit economics, and at least plans for profitability in the near future.  

The lackluster 2023 has left many asset owner LPs debating whether VC/PE offers returns worth the risk, particularly given the illiquidity associated with the asset class, which should come with a premium. While we don’t believe this trend will last forever, we anticipate that many investors will be satisfied with their current allocations at least until more capital is distributed vs. the juicy on-paper markups of prior vintages (CB Insight State of Venture).

Where’s the exit?

For now, funds are having a hard time banking those distributions. The current ratio of exits to investments ended 2023 at~0.37x, a figure that has fallen annually since a 2014 prior decade peak of~0.57x (Pitchbook).  

For now, the growth at all costs era is out of favor. Meanwhile private company acquisition figures in 2023 were down overall, and the number of IPOs declined considerably (WillmerHale, EY, Visual Capitalist). Although some of the larger investment banks hold more positive outlooks on public markets as a source of private company / private investor liquidity in the later parts of 2024, the overall sentiment that we’re hearing is one of cautious optimism (JPM Innovation Outlook).

Fundraising is a drag

While rarely an easy process, private fund managers are having an especially hard time raising capital at the moment, with the majority failing to fully reach targets. With exception from the most established groups, we expect new funds to raise less (particularly emerging managers), or even decide to return money to LPs in some cases where AUM is too low for meaningful management fees. This dynamic will require managers to better showcase their investment theses and how they differentiate, while putting more power in the hands of the end asset owners.

Better performance benchmarking

In line with the current state of the market, we anticipate that asset owners will also want to better understand how the performance of their private investments tracks vs. their opportunity cost. While not new, the idea of a public market equivalent (PME) benchmark is still a sought after tool in this regard, where traditional indices like the S&P500 or Nasdaq are imperfect comparisons for private markets (WSJ). We believe that these exercises will continue and can be valuable in helping manage expectations around characteristics such as return, risk, volatility, liquidity particular to this asset class.

More regulation and reporting

In May 2023, the SEC imposed substantial increases to the world of private fund reporting. Overall, the regulatory move will place more of a burden going forward on fund managers and private fund advisers to comply with greater transparency and more timely disclosure of activity underpinning investor funds (DLA Piper, Dechert).

While increased regulation inherently comes with costs, we believe added transparency in privates will have a favorable impact on the interests of end asset owners who we believe are gaining, and deserve, additional, powerful data to better inform their allocation decisions. And in an inherently opaque private market, Clockwork is a proponent of reporting and the general concept that keeping investors in the loop about how their funds are being used and to what result, improves market efficiency. As private markets can move towards more dynamic, readily available information, we expect 2024 to be a breakout year in which investors, managers, and advisers alike will benefit as more innovation and openness permeate the technology, operations, and culture of private investing.

Creative structuring continues

While private credit is on most investor wish lists in 2024, other less common structures are also gaining favor in the current environment. We think it’s likely we’ll see more revenue based financing and hybrid deals in addition to the traditional equity, convertible debt, and SAFEs. 

On the company side, many founders and management teams are waking up to the reality that venture is not the only form of financing for private businesses. This is a good thing, as it will drive funds to hone in on their own product market fit, and should lead to capital structures more appropriate for given business models. The graveyard of 2023 is littered with promising companies and brands who forced a VC path to their own demise. 

We anticipate a growing number of private companies to seek non-VC investment or a combination of funding sources depending on the cycle of their business. In the current market, founders are less incentivized to raise equity and dilute themselves and existing shareholders. Savvy founders should be able to navigate how they raise what type of capital when, as it best suits their longer term strategy.

Private wealth’s demand for alternatives

The silver lining in the cloudy private market landscape of 2024 is that demand is still underserved among the HNW and UHNW investor segments. Gone are the days of the 60/40 stock/bond portfolio, as nearly all would agree that the inclusion of alternative investments is prudent for most investor profiles. As such it’s not a surprise that nearly 90% of financial advisors want to increase their investments in alternative asset classes by the end of 2024 (RIA Intel, AET).  

The added exposure of a variety of these investments is not without its challenges, however, namely as relates to expertise, access, and information management. We’re predicting that advisors will further evolve their capacity to better cover private markets, to the benefit of the full capital stack, and hopefully the best ideas and their inventors.

Crypto corner

The hottest news in the world of digital currencies of late has been the SEC approval and launch of Bitcoin ETFs. While crypto bulls may be surprised by the lack of positive price movement since, we cannot ignore the institutional establishment associated with this event. With an Ethereum ETF also expected in the coming months, we continue to believe that at least the two main digital assets continue to have longer term positive trends based on institutional and individual investor interest.  

‍That said, aside from the store of value argument, it is concerning how few practical use cases have emerged from the entire ecosystem – could 2024 be the year where that evolves? At a minimum, we hope for fewer collapses, Ponzis, and leadership arrests.