AI aligns closely with reshoring (of offshore facilities) and deglobalization. Companies moving plants closer to home may turn to AI to ease higher labor costs. That could help drive a surge in private sector AI investment in the coming years.

Additional AI use cases include:

• Medicine: To help read radiological imaging to detect diseases
• Consumer applications: For real-time pricing of goods and services (such as ride hailing)
• Drug discovery: To aid pharmaceutical companies in combing through vast datasets

2. Automation and robotics: Critical for companies to remain competitive

Meanwhile, amid today’s tight U.S. labor market, companies have a pressing need to improve efficiency and reduce the time staff spend on redundant tasks. Like AI, automation³ technologies may come to the rescue. Global automation and robotics markets are projected to quadruple in size from 2023 to 2030, from about $39 billion to $160 billion.⁴

Advanced automation and robotics are also related to “smart security,” an investing area that’s come to the fore since Russia’s invasion of Ukraine.⁵ Defense companies producing advanced drones (and other autonomous surveillance technologies) consider it a priority. Many manufacturers have already deployed advanced automation as part of these devices.

Other use cases for automation and robotics include:

• Mining and manufacturing: To handle dangerous materials and processes
• Supply chain automation: For simple tasks such as physical delivery
• Restaurants and dining: To take orders and bring out food
• Security automation: With software playing an increasingly important role in conflicts, security and physical defense automation will likely become critical

3. Cybersecurity: Anticipating continued demand as threats multiply

Cybersecurity⁶ has become crucial to defending government, corporate and even consumers’ infrastructure, particularly now that cloud computing offers bad actors an even greater attack surface to infiltrate.

Cybersecurity also enables all the technological advancements we’ve described. Without it, companies couldn’t invent or invest in innovation, and governments could not keep secrets.

That it is so essential helps explain why the value of cybersecurity private equity (PE) deals appeared to remain relatively resilient during the volatile market environment of 2022. Cybersecurity deals in the first three quarters of 2022 roughly equaled all of 2021.⁷

Cybersecurity use cases include:

• Tech, financial and other firms: To enhance cyber defense, facilitate remote work particularly in the cloud, and to allow safe storage, secure management and easy retrieval of sensitive data
• Social media companies: To safeguard online users’ data
• Energy companies: To protect critical infrastructure

4. E-commerce: Declining valuations may offer an attractive entry point

E-commerce has increasingly permeated our lives. Of course, the COVID-19 pandemic accelerated its growth as a percentage of retail sales, and the trend is likely to continue rising.

Like PE, venture capital (VC) funding flows into e-commerce were relatively resilient during a tough year: Median and average valuations of VC firms’ holdings in late-stage, e-commerce startups climbed in 2022, even after surging in 2021. Recently, some signs point to a decline in these extraordinarily high valuations, which could open the door for new investors seeking an attractive entry point.

Promising e-commerce use cases include:

• Traditional businesses: For transitioning to a hybrid model (brick-and-mortar and online sales), opening new marketplaces
• Social media: To provide a livestreaming platform for influencers promoting and selling goods and services
• Commerce: For business-to-consumer, business-to-business and consumer-to-consumer transactions

5. Cloud software: Corporate storage, analytics may propel growth

The use of cloud software⁸ has become ubiquitous across industries and central to how many large enterprises function. (Some cloud applications also target and serve consumers.) The global cloud computing market is expected to grow rapidly – from under $500 billion today to almost $1.4 trillion by 2030.⁹

Use cases in which we have strong conviction include:

• Data storage and access: To allow corporations, individuals and social media platforms to store files (including vast photo and video files) and collaborate from any device, anywhere
• Analytics: To analyze data stored on cloud platforms for business insights
• Crisis resiliency: For backup strategies to store and recover critical files in an emergency

6. Electrification: Energy storage and battery recycling could be key

The transition to renewable energy will require decades of innovation across industries. Electrifying transportation will likely be key. The rising popularity of electric vehicles (EVs) has produced an urgent need for battery (and parts) recycling – a new circular supply chain.

We see promise in several companies pioneering recycling processes and technologies, and forging partnerships across EV and energy storage industries, since collection will be a costly challenge. Also exciting is remanufacturing lithium-ion batteries using recycled content.

Partnerships with automakers will be important to achieve economies of scale and create a robust closed-loop battery ecosystem. In the future, we anticipate an industry that will help solve environmental challenges and unlock a new source of raw materials at a time of material shortages.¹⁰

Electrification use cases include:

• Properties: For lower-emission electricity to power appliances (e.g., heat pumps) in place of natural gas
• Mass transit: The electrification of public transport
• Semiconductors and other component makers: Sales should rise for manufacturers of solar panels, wind turbines and other infrastructure crucial to the energy transition
• Recycling: To reduce pollution and increase supply of rare, critical materials during the energy transition

Where does growth fit into your portfolio?

Your allocation to growth will vary based on your risk tolerance. We generally think many investors should maintain a 10%–20% allocation to growth within the venture capital portion of their portfolios in order to access long-term growth opportunities that may not be available in public markets.

Notable risks of growth equity investing include managers’ return dispersion (which is dramatic compared to the broad market) and a higher loss ratio than other investments. With the end of the easy money era, we expect loss ratios¹¹ to normalize around 15%–20%.

VC funding for technology has retreated to pre-pandemic levels after an unusual period in 2021 when deals and valuations soared. This decline isn’t unexpected because of tight financial conditions, and since private markets typically follow public market downturns, with a lag.

Venture capital funding for technology is back to pre-pandemic levels

An economic slowdown may help identify the best managers. More competitive dynamics, in the absence of easy money, tend to favor more tenured growth investors with experience picking winning companies in different economic environments. Indeed, recent history has shown that funds with experienced managers tend to retain their values during volatile markets, while newer managers have seen their aggregate fund values fall.

As conditions tighten, managers will also become more selective, and VC firms should have the power to negotiate better deals with companies that need cash, even with higher funding costs.

Firms with experienced managers remained strong in 2022