The number of sub-$100 million private equity and venture capital deals in the U.S. dropped 41% in 2021 compared to the previous year as investors loaded with cash sought bigger, later-stage investments.

Nonpublic, U.S.-based private equity and venture capital firms made 76 deals valued below $100 million in 2021, compared with 162 deals valued at $100 million or more, according to S&P Global Market Intelligence. The figures are for deals with disclosed amounts only.

Globally, private equity and venture capital deal-making soared in 2021 as managers sought to spend records amounts of dry powder collected in 2020 when investors allocated the bulk of capital to large, well-known firms during the pandemic.

"One of the reasons why investors were so excited about larger deals in 2021 is because of a lot of dry powder in hand, which they managed to raise during the pandemic period," Kebelyn Lee, associate vice president of research insights at Preqin, said in an interview.

The robust exit environment in 2021 was another factor. "2021 was a very good year for private equity exits. That also attracts more late-stage investors going into high-growth, successful technology companies with the prospect of a good exit avenue," Lee said.

Over the last five years, Starwood Capital Operations LLC was the most active nonpublic firm with transactions below $100 million, Market Intelligence data shows. Between 2017 and 2021, the firm committed $923.8 million in total across 22 deals. The second most active firm was GMF Capital LLC with $556.5 million worth of investments across 12 transactions.

More early-stage investments?

U.S. Federal Reserve action could change the amount of capital committed. Over the next 12 months, sub-$100 million deals are likely to see stronger activity compared with the larger deal bracket as central banks move to hike interest rates.

"Theoretically speaking, if interest rates do rise by 7x towards the end of the year, it's natural for us to assume that the equity market will see a healthy correction across all sectors, which will take a toll on the exit environment for later-stage deals. It's harder for later-stage companies to exit, so it would be very natural for investors to chase portfolio companies that are in the early stage," Lee said.