Companies will face major challenges in raising capital in 2022–2023
Fundraising slowed down significantly in the first half of 2022 as capital became more expensive, Russia’s invasion of Ukraine becomes more serious and markets and corporations accepts the fact that there will be a recession in 2022–2023. According to the Financial Times, companies around the world raised $4.9tn in the first half of 2022 through new bonds, loans and equity. This represents a decrease of 25 per cent from the $6.6tn raised in the first half of 2021.
At the end of May 2022, PitchBook, the venture capital, private equity and M&A database, released its Global Private Fund Strategies, summarizing private capital fundraising activity. According to the report, Q1 2022 private fundraising figures were less than one-quarter of total 2021 fundraising, indicating a slowdown. This however does not indicate the market are “nose-diving”.
-Overall, it will be harder to raise capital in 2022, and early-stage companies and emerging managers are likely to face difficulty fundraising due to their limited track records and non-established relationships with the investment community. Fund-raising in the past few months does indicate that the environment is shifting away from the record setting peaks of 2021, when global funding doubled compared to 2020. So there is space for some optimism here.
-Interest rate expectations have also rapidly recalibrated, and investors now expect the Federal Reserve’s interest rate to sit at roughly 3.5 per cent by the end of 2022, which would mean markets ending the year with the highest federal funds rate since the start of 2008.
-Globally, the slide in new fundraising was concentrated among lower quality companies, while high-quality, investment-grade issuance remained more in line with its historical trend. Junk bond sales in the US sank to less than $60bn, down from more than $250bn in 2021.
-Companies raising from 500K to 5mn will have to hardest time over the next 12 months given that this early-stage venture capital space has experienced a significant slow-down as investor wait for better market conditions.
Industries that raised more in 2022
Contrary to the overall slower market trend, there are some sectors that have continued to attract large investment from venture capitals as well as from family offices. These sectors that raised more in 2022 include digital marketing, blockchain, gaming, supply chain management, renewable energy, and cyber security.
Capital raise slowdown is not necessary all bad news. Central banks hope that raising borrowing costs will slow capital demand and, in turn, reduce price rises. The slowdown in capital raising witness in the first 6 months of 2022 is a signal that global central bank efforts, particularly in the US and in the EU are starting to pay off. If anything, periods of crisis create an opportunity to accelerate change at a much quicker pace. Now it is a great time for entrepreneurs and business leaders to adapt to these changing market conditions and come out of this period with a renewed focus on digital transformation, sustainability and focus on the sector you know best. A final word of advice, if you are in the market for capital, the Gulf Cooperation Council (GCC) countries are awash with cash and interested to invest in early stage and disruptive companies, particularly if they are willing to relocated to the Gulf. Time to seize this crisis moment and think boldly.