Introduction
Welcome to the McKinsey Global Private Markets Review for 2024! In this review, we will explore the current state of private markets and delve into the challenges and opportunities that lie ahead. It has been an eventful year for private markets, with macroeconomic headwinds, declining fundraising, and shifting investor preferences. However, amidst the uncertainty, there are still pockets of growth and resilience. So, let’s dive in and discover what the future holds for private markets.
Macroeconomic challenges continued
If 2022 was a tale of two halves, with robust fundraising and deal activity in the first six months followed by a slowdown in the second half, then 2023 might be considered a tale of one whole. Macroeconomic headwinds persisted throughout the year, with rising financing costs and an uncertain growth outlook taking a toll on private markets. Full-year fundraising continued to decline, weighed down by the “denominator effect” and a less active deal market. However, private market managers are adapting to this new era of investing by focusing on revenue growth and margin expansion.
Global fundraising contracted
Fundraising fell 22 percent across private market asset classes globally, reaching the lowest total since 2017. While North America and Europe experienced declines in line with the global trend, fundraising in Europe proved to be the most resilient, falling just 3 percent. Asia, on the other hand, saw a precipitous decline in fundraising, with numbers sitting 72 percent below the region’s 2018 peak. Despite these challenges, private equity buyout strategies posted their best fundraising year ever, and larger managers and vehicles fared well, continuing the trend towards greater fundraising concentration.
The denominator effect persisted
Although the 1,000 largest US retirement funds grew 7 percent in the year ending September 2023, many limited partners (LPs) remain overexposed to private markets relative to their target allocations. The lack of exits and rebounding valuations drove net asset values (NAVs) higher, exacerbating the overallocation issue. Despite these headwinds, recent surveys indicate that LPs remain committed to private markets, with the majority planning to maintain or increase allocations over the medium to long term.
Investors fled to known names and larger funds
Fundraising concentration reached its highest level in over a decade, with investors favoring the largest fund managers. The top fundraisers accounted for a significant portion of aggregate commitments, highlighting the trend towards greater concentration. However, smaller and newer funds struggled, with fewer funds of less than $1 billion closed during the year and a decline in new manager formation.
Dry powder inventory spiked (again)
Private markets assets under management totaled $13.1 trillion as of June 30, 2023, and dry powder reserves increased to $3.7 trillion. This marks the ninth consecutive year of growth for dry powder, as new commitments continued to outpace deal activity. Private equity strategies saw a divergence in performance, with buyout and venture capital taking different courses. Buyout had its highest fundraising year ever, while venture capital fundraising declined nearly 60 percent.
Private equity entry multiples contracted
Private equity buyout entry multiples declined, reflecting the changing market dynamics. PE managers are facing higher financing costs and lower multiples, which require a shift in focus towards revenue growth and margin expansion. With falling multiples and higher financing costs, revenue growth and margin expansion are taking center stage for private equity managers.
Real estate receded
The real estate market faced challenges, with slowing rent growth, elevated financing costs, and price discovery issues. Deal volume and investment performance declined, and capital shifted away from core and core-plus strategies. However, opportunistic strategies benefited from the shift, with investors focusing on capital appreciation over income generation.
Private debt pays dividends
Private debt proved to be resilient, with fundraising declining just 13 percent and the asset class posting the highest returns among all private asset classes. Private debt securities tied to floating rates enhanced returns in a rising-rate environment. Managers successfully navigated the rising incidence of default and distress in the broader leveraged-lending market.
Infrastructure took a detour
Infrastructure and natural resources fundraising faced significant challenges, with a decline of 53 percent to the lowest total since 2013. However, there are reasons to believe that infrastructure’s growth will bounce back, as LPs remain bullish on their deployment to the asset class.
Private markets still have work to do on diversity
Private markets firms are making progress in improving diversity, with representation of females and ethnic and racial minorities increasing. However, there is still a long way to go in achieving broad-based parity across all levels. Private markets firms must take fresh approaches to hiring, retention, and promotion to increase representation.
Artificial intelligence generating excitement
Generative AI has been a hot topic in private markets, with players excited about its potential to optimize various areas, including thesis generation, deal sourcing, due diligence, and portfolio performance. While the technology is still in its early stages, pilot programs are already underway, and adoption is expected to accelerate in the coming years.
Conclusion
Overall, private markets faced challenges in 2023, with macroeconomic headwinds impacting fundraising, dealmaking, and performance. However, there are still opportunities for growth and resilience within the industry. Private markets continue to adapt to the new investing era, focusing on revenue growth, margin expansion, and embracing technological advancements. As we look ahead to 2024, it will be crucial for firms to navigate these challenges effectively and seize the opportunities that lie ahead.
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