We approached our CEO to share his thoughts on the market’s outlook for the next 5 years.
We invite you to read his insightful opinion below.
Speaking about investment perspectives, both globally and in relation to a specific geography, for a five-year period would be at the very least imprudent and could even be considered as an act of intellectual arrogance.
Naturally, there are models that can, based on past data, identify trends for the future. In the absence of the required amount of data to make trend projections, as well as the possession of such models, I will provide my modest contribution regarding some of the trends that I believe can be established, based on a set of factors, some latent and others perfectly visible, in the current reality and in Portugal. Of course, i) this is solely my opinion and ii) it will be presented in a general manner, as a brief response is intended.
Investment in a specific geography is dependent on a set of local factors that influence both: the investment originated on the relevant geography and the investment originated on other geographies. I would organize these factors into two groups (Macro and Micro), and the following factors can be identified for Portugal:
- Political stability
- Investment openness
- Education and training
- Sociability (peaceful and friendly population)
- Low volume of investment in start-ups
- High potential for creating new businesses
- Absence of an organized private investor market
- Investor confidence
- Low volume of investment in start-ups
It is also important to highlight that there are specific factors from other geographies that condition investment in Portugal (e.g., ease/difficulty of capital movement) or universal factors, although their behaviour varies in each geography (inflation, cost of capital, European investment programs – PRR).
Finally, I cannot fail to mention events that are in our recent memory, which, being unpredictable, have a decisive influence on economies and consequently on investment (e.g., COVID-19 and the Ukraine war).
Identifying trends, taking into account all the factors mentioned, is therefore a task whose complexity invites giving up, but I will prevail.
What do the above-mentioned factors tell us?
The macro factors clearly favour investment in Portugal and have already been extensively discussed in many documents by individuals with more knowledge in these areas than myself. Thus, the restrictions will lie much more in the micro factors (we will discuss them in relation to venture capital) and the universal factors (inflation, cost of capital and PRR).
Regarding the universal factors, my belief is that:
- Inflation will be controlled in the next two years.
- The war will be over before the end of 2024.
- European funds, despite being wrongly allocated by the government, in terms of economic sectors, will help investment to grow.
Therefore, although the high inflation situation and the war in Ukraine are slowing down the pace at which investment would grow if they did not exist, and causing a reversal in underlying investment yields, the trend will be towards moderate or zero growth in investment levels in 2023 and 2024, with an acceleration expected in the following years.
Will this trend also apply to venture capital investment?
Regarding venture capital investment we will approach the matter with two different perspectives:
- Capital Raising
- Investment destination
Capital raising for investment in venture capital assets has largely relied on specific programs (e.g., tax benefits, residency permit). The natural sources of capital raising are institutional investors, family offices, and individual investors, with the latter currently being monopolized by banks. The absence of an organized market for individual investors contributes greatly to this fact. The creation of such a market depends on establishing a relationship of trust between investors and managers, similar to what exists in other geographies. This is a market that will flourish in the near future and should show some signs within the next five years.
The theory defines in a quite specific and detailed manner the types of investments made by venture capital funds, classifying them accordingly. However,
Tthe approach in this text is more general and considers the investments grouped as follows:
- Investments in start-ups
- Investments in established businesses.
From the analysis of the Portuguese market, it can be concluded that venture capital funds’ investment has been primarily directed towards established businesses. However, there are starting to be some venture capital firms, especially in more technological niches, that have successfully invested in start-ups, mostly created in incubators.
I believe that the future will bring some changes, which can be characterized as follows:
- The volume of investment directed towards established businesses will continue to represent the largest share.
- The number of investment operations in start-ups will significantly increase and may quickly surpass those conducted in established businesses.
- The volume of investment in start-ups will experience significant growth but will still be lower than that in established businesses