No sector appears to be immune from the slowdown in venture capital fundraising. We thought this week’s announcement by OrbiMed that it had raised $4.3 billion across three funds might be a sign that healthcare-focused funds were defying the pullback. Alas, that’s not the case.
Things looked promising for healthcare in the first half of the year. Silicon Valley Bank’s Healthcare Investments and Exits Mid-Year 2023 Update observed, “After a relatively slow H2 2022, investor fundraising [for US healthcare funds] accelerated to $6.8 billion in Q1 2023 and held steady at $6.9 billion in Q2 2023. If this pace were maintained, 2023’s life-sciences-focused fundraising would near 2021’s record pace [of $28.3 billion].”
Jackie Spencer, one of the authors of the report, told me this week she would be “very surprised if we exceeded 2022 or 2021.” In fact, based on preliminary numbers she has seen for overall US venture fundraising in Q3, “I suspect that if you extrapolate that just for life sciences, we’re going to be down considerably in Q3 relative to where we were in Q1 and Q2,” said Spencer, who is SVB’s head of relationship management for life sciences and healthcare banking.
That correlates with the downward trend seen in Venture Capital Journal’s Q3 fundraising report released this week. We show that venture funds worldwide raised a combined $76.3 billion in the first nine months of this year, down 45 percent from $139.4 billion in the same period in 2022. The number of funds holding final closes was also down, dropping from 910 in the first three quarters of 2022 to 432 in the first three quarters of 2023.
Q3 was also the worst quarter of the year for the amount of capital raised by venture firms worldwide, at just $18.2 billion, compared to $31.4 billion in Q2 and $26.7 billion in Q1. On a positive note, Q3 saw the largest number of venture funds get closed this year. A total of 177 funds closed in Q3, up from just 88 in Q2 and 167 in Q1. (We don’t break out fundraising totals for specific sectors such as healthcare.)
This is not to say there hasn’t been any positive news for healthcare fundraisers. Healthcare specialist OrbiMed announced a massive haul for three funds this week. It raised $1.86 billion for its OrbiMed Private Investments IX, beating the venture fund’s target of $1.75 billion, said managing partner Carter Neild. The firm also beat the $1.5 billion target for OrbiMed Royalty & Credit Opportunities IV, closing on $1.71 billion, and hit its target for OrbiMed Asia Partners V, closing on $751 million, Neild said.
“We found strong interest in all three funds from the LP community, which enabled successful raises across the board,” he said, adding that about 90 percent of the capital came from existing LPs.
With a lot of healthcare capital still remaining to be deployed, LPs are expected to be cautious about committing to new healthcare vehicles. For the US alone, healthcare-focused funds alone have raised more than $60 billion combined since the start of 2021, according to SVB, and VCs have been slow to put that fresh capital to work.
“We’re going to see [LPs] asking investors to be more patient, to not call capital, to extend the life of that fund and really slowly deploy capital until we see start seeing more returns,” SVB’s Spencer predicted.
She is optimistic that LPs will begin to see more liquidity in 2024. “The public markets continue to be very slow, but we’re starting to see a glimmer of hope on the M&A side,” she said. “I think we’ll see even more deals get done in the next 12 months and as liquidity starts hitting the market, LPs will be more interested in deploying quicker and re-upping on funds.”