VC firms, tech startups face growing pressure for liquidity. Enter private equity

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Subscribe to enjoy similar stories. The alchemy of the venture capital process, in which investments are catalyzed over a number of years into a successful IPO or a big M&A deal, is under pressure. Investors are demanding to extract returns from VC firms and startups even though the IPO market is still in a state of recovery, reflecting lingering economic anxieties and other factors.

IPOs in 2024 have outpaced last year, but activity remains below normal levels, the law firm Ropes & Gray said in an October report. Those dynamics are driving VCs and more mature startups to create liquidity by selling to private equity, even though the rewards often aren’t nearly as dazzling as in a public offering. Meanwhile, PE activity in the tech sector is picking up.

Tech as a percentage of total PE deal value was 28.3% in the third quarter, up from 18.7% in the second, as buyers and sellers had an easier time agreeing on prices, according to Pitchbook private equity analyst Garrett Hinds. Capital was cheaper, and PE buyers could pay a little more. “Some of the VC-backed companies that have been private for longer and have sufficient scale have been in the radar of private equity," Hinds said.

Looking forward, he said, private-equity buyers may broaden their interests beyond the highest-quality targets that were evident in the third quarter. Notable private-equity acquisitions this year include KKR and Dragoneer Investment’s $4.8 billion deal for educational tech company Instructure Holdings and Bain Capital’s $4.5 billion acquisition of financial tech company Envestnet. Private equity’s interest in tech has been on the rise for years.