McKinsey & Company’s 2018 annual review of private markets confirms global fundraising and assets under management (AUM) reached record highs in 2017, while managers once again faced mild difficulties to deploy capital, as deal count fell, multiples went up, and dry powder increased for the ninth consecutive year.
The report, called ‘The rise and rise of private markets’, is the first publication of the year to comprehensively analyse 2017 performance with the full year’s data across five asset classes – private equity, infrastructure, private debt, natural resources, and real estate. As well as examining capital flows and deployment, the report also reviews dynamics between Limited Partners (LPs) and General Partners (GPs) and identifies several emerging trends, including LPs beginning to form deeper, more strategic relationships with a smaller set of managers.
Private asset managers raised nearly USD750 billion globally in 2017, a record and an extension of the cycle that began eight years ago. Private equity and debt enjoyed large increases (11 per cent and 10 per cent respectively), while other (typically smaller) asset classes fell: natural resources by 5 per cent, and infrastructure by 4 per cent. It was the second year of double-digit growth for private equity. Within this tide of capital, one trend stands out: the surge of megafunds (of more than USD5 billion), especially in the United States, and particularly in buyouts. Megafunds now account for 15 per cent of total fundraising, up from 7 per cent in 2016, and exceeding their previous peak of 14 per cent in 2007. For comparison, fundraising in middle-market buyouts (for funds of USD500 million to USD1 billion) grew by 7 per cent, a healthy rate after years of solid growth.
Bryce Klempner, Partner, McKinsey & Company, and co-author of the report, says: “The big story in 2017 was about scale. Megafunds raised more than twice as much in 2017 as the year before. The industry’s record growth last year is attributable to a single sub-asset class in a single region: US buyout funds over USD5 billion. If mega-fundraising had remained at the already high level of 2016, overall private market fundraising would have been down by 4 per cent. The renewed interest in the biggest funds, and biggest firms, is because they’ve delivered great performance, have been leading the way in terms of institutionalisation, and have proven they’re capable of deploying large mandates.”
The industry faced some mild headwinds investing its capital in 2017. Though the private equity deal volume of USD1.3 trillion was comparable to 2016’s activity, deal count dropped for the second year in a row (by 8 per cent, to around 8,000). In two related effects, the average deal size grew (by 25 per cent, from USD126 million in 2016 to USD157 million in 2017); and managers accrued yet more dry powder, now estimated at a record USD1.8 trillion. Private markets’ AUM, which includes both committed capital, dry powder and asset appreciation, surpassed USD5 trillion in 2017, up 8 per cent year-on-year.
Aly Jeddy (pictured), Senior Partner, McKinsey & Company, and co-author of the report, says: “Although 2017 was yet another bumper year for private markets, we’re seeing a few new dynamics play out. Limited partners are demanding greater consistency in returns, while fund managers’ biggest challenge is now how to deploy capital, rather than raise it, since there is more competition and higher multiples for the deals being done. There are also new players, including traditional asset managers with strong reputations, entering the sector, placing even more pressure on fund managers. And as the sector continues to grow in 2018, we’re rightly seeing a renewed emphasis on process – on sourcing deals, diligence, portfolio company transformation, and talent.
“The buckets from which limited partners allocate capital to the industry are changing significantly too. Allocations to private markets investing will be much larger going forward because now private equity is increasingly viewed as a sub-component of the much larger equities bucket and private credit is increasingly viewed as a sub-component of the much larger fixed income bucket. Neither is in that small allocation in the corner formerly known as ‘alternatives’.”
