A year of turmoil for the private markets, but PE continues to outpace public markets, finds McKinsey report
McKinsey & Company today published its Global Private Markets Review 2021 – A year of disruption in the private markets – maps out a tumultuous year for global private markets, as Covid-19 wrought havoc on fundraising and deal activity, but finds that private equity rebounded vigorously in the second half of 2020, as buyout fundraising nearly doubled in Q3 and Q4 relative to the first half of the year in North America, and more than tripled in Europe.
The report also concludes that, by nearly any measure, private equity has still outperformed public market equivalents – with net global returns of over 14 percent.
Overall funds raised fell slightly year-on-year due primarily to an apparent short-term discontinuity in the early months of the pandemic, but, the pre-pandemic pace of fundraising returned by Q4. AUM growth and investment performance in most asset classes eased off in the spring as the industry adjusted to new working norms, then came back strong in the latter half of the year. Private equity purchase multiples kept climbing and dry powder reached another new high, standing at USD1.4 trillion (60 percent of the private markets total), having grown 16.6 per cent annually since 2015.
Matt Portner, Partner, and co-author, says: “We typically consider meaningful changes in private markets over years or decades, but the pandemic really forced a reassessment on a quarterly basis. Despite that pace of change, most asset classes returned to strong performance and growth, with some notable exceptions.”
Brian Vickery, Partner, and co-author, adds: “The strength and speed of the rebound suggest resilience and continued momentum. Investors are increasingly looking to private markets for higher potential returns in a sustained low-yield environment.”
In a year that was unlike any other, real estate investment took a significant hit, as conventional notions of distinct work and home spaces were blurred, while venture capital flourished, driven by outsized interest in tech and healthcare. Private equity secondaries and SPACs also boomed. Private debt was a relative bright spot, with the asset class entering 2021 with an all-time record fundraising pipeline.
In a year marked by disruption, private market investors did, however, confront a need for transformation. Diversity, equity, and inclusion (DE&I) came into sharp focus, as both GPs and LPs, began to be more purposeful in identifying and tracking DE&I metrics. More GPs and, in particular, LPs began tracking environmental, social, and governance (ESG) metrics in earnest. Some – a small but growing minority – have begun to use these “non-financial” indicators in their investment decision-making.
Bryce Klempner, Partner, and co-author, says: “The pandemic has accelerated change within the private markets. The opportunity for greater diversity in the industry has long been clear, but there is now a greater sense of urgency to creating more equitable and inclusive places to work, and in doing so, attracting better talent. ESG too was a major theme before the pandemic, but capital flowing into ESG-related investment strategies saw an unprecedented growth in 2020. ESG themes have now reached an inflection point, becoming increasingly top-of-mind for funds, LPs, talent, consumers, and regulators.”