McKinsey & Company has published its 2018 annual review of private markets that 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 its ninth consecutive year.
The report, called ‘The Rise and Rise of Private Markets’, is the first publication of the year to comprehensively analyze 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 and general partners and identifies several emerging trends, including LPs beginning to form deeper, more strategic relationships with a smaller set of managers.
Capital Flows
Private asset managers raised nearly $750 billion globally in 2017, a record and an extension of the cycle that began 8 years ago. Private equity and debt enjoyed large increases (11% and 10% respectively), while other (typically smaller) asset classes fell: natural resources by 5%, and infrastructure by 4%. 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 $5 billion), especially in the United States, and particularly in buyouts. Megafunds now account for 15% of total fundraising, up from 7% in 2016, and exceeding their previous peak of 14% in 2007. For comparison, fundraising in middle-market buyouts (for funds of $500 million to $1 billion) grew by 7 percent, a healthy rate after years of solid growth.
“The big story in 2017 was about scale. Megafunds raised more than twice as much in 2017 as the year before,” said Bryce Klempner, a partner at McKinsey & Company, and co-author of the report. “The industry’s record growth last year is attributable to a single sub-asset class in a single region: US buyout funds over $5 billion. If mega-fundraising had remained at the already high level of 2016, overall private market fundraising would have been down by 4%. 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 institutionalization, and have proven they’re capable of deploying large mandates.”
Mr. Klempner focuses on counseling both institutional investors (pensions, sovereign wealth funds) and alternatives firms (private equity, real estate, hedge funds) on firm-level topics of strategy, organization, governance, and processes, as well as on individual transactions and portfolio companies. He also leads McKinsey’s research on private equity. Mr. Klempner works in McKinsey’s Boston and New York offices.
Deployment
The industry faced some mild headwinds investing its capital in 2017. Though the private equity deal volume of $1.3 trillion was comparable to 2016’s activity, deal count dropped for the second year in a row (by 8%, to around 8,000). In two related effects, the average deal size grew by 25%, from $126 million in 2016 to $157 million in 2017; and managers accrued yet more dry powder, now estimated at a record $1.8 trillion. Private markets’ AUM, which includes both committed capital, dry powder and asset appreciation, surpassed $5 trillion in 2017, up 8% year-on-year.
“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,” said Aly Jeddy, a senior partner at McKinsey & Company, and co-author of the report. “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.”
Mr. Jeddy is based in McKinsey’s New York office, serving financial institutions globally. He has led the firm’s Private Equity & Principal Investing Practice for the Americas as well as the Strategy Practice. In private equity and principal investing, he leads McKinsey’s thinking on the outlook for the asset class. He has worked in McKinsey’s San Francisco, London, and Paris offices, and at the McKinsey Global Institute.
“The buckets from which limited partners allocate capital to the industry is 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’,” concluded Mr. Jeddy.
For free access to McKinsey’s report ‘The Rise and Rise of Private Markets’ click HERE.
© 2018 Private Equity Professional | February 14, 2018
