Global private markets AUM and total deal value both reached record highs in 2018 while fundraising eased slightly from prior records, according to McKinsey & Company 2019 annual review report: ‘Private markets come of age’.
The report offers comprehensive analysis of 2018 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 considers innovations in the market, evolving dynamics between Limited Partners and General Partners, and emerging trends by asset class.
According to the report, private equity net asset value has grown by 7.5x since in 2002 – more than twice the growth rate of public market capitalisation, which is up 3x in the same period.
Between 2006 and 2017, while the number of publicly traded companies in developed markets fell 16 per cent from 5100 to 4300, companies under private equity ownership increased by 106 per cent from 4000 to 8000. These shifts support the case that private markets are more important than ever for securing broad exposure to global economic growth.
The industry reveals rapid development: Investors have seen a marked increase in the flexibility of private markets asset classes, including a thriving secondaries market, growing ability to manage return characteristics such as J-curve, and many new types of funds. At the same time, competition continues to mount for access to the highest-performing funds and to sweeteners such as co-investment.
There are many similarities between the private market’s environment now and in 2007: deal pricing is high, covenant-light debt is common, dry powder keeps rising, and new firms are appearing every day. At the same time, there are some important differences: the market is twice as large, the average deal is smaller and less levered; club deals are no more; fundraising has slowed slightly; and GPs and LPs alike are more attuned to vintage risk. Whenever the market slows, hard-learned lessons from the last downturn may help players better weather the disruption.
Bryce Klempner, Partner, McKinsey & Company, and co-author of the report, says: “More investors keep discovering more reasons to come to private markets. It’s not just about predictable outperformance anymore, but also access to specific types and pockets of growth. Meanwhile, GPs have increased their pace of innovation, level of client service, and range of offerings, further driving up demand.”
While private equity fundraising fell overall, venture capital bucked the trend, growing 13 per cent year on year (18 per cent per annum over the last 5). Growth was driven largely by a cohort of newer managers and very large funds that have caused some to question the boundaries of the asset class. Deal value reached an all-time high of USD251 billion in 2018, including a record 25 rounds of over USD1 billion apiece. The stellar success of the largest unicorns is a reminder that VC gains tend to be concentrated at the top – the asset class has a lower median return than buyouts – but despite challenges in accessing top firms, investors keep coming.
Infrastructure fundraising grew 17 per cent globally and 59 per cent in Europe, backed by a rising long-term secular need for investment. The Global Infrastructure Initiative, led by the McKinsey Global Institute, estimates that at least USD4 trillion of annual investment is required by 2035 just to keep pace with economic growth. More of this required investment is being filled by private markets, as some investors see it as a strong defensive bet.