Private asset performance remains below historical averages

Private markets entered a slower cycle in 2023, continuing to decline from their peak in 2021.

McKinsey’s Global Private Markets Review 2024 found that in 2023, persistent macroeconomic headwinds continued throughout the year, which combined with rising financing costs and an uncertain growth outlook to slow private markets.

It found that full-year fundraising continued to decline from 2021’s peak in 2023 and said fundraising was hampered by the “denominator effect”  that persisted in part due to a less active deal market. Despite a considerable recovery in the denominator, many limited partners (LPs) remain overexposed to private markets relative to their target allocation.

As a result, managers generally held onto assets to avoid selling in a lower-multiple environment, which in turn sustained an activity-dampening cycle in which distribution-starved LPs reined in new commitments, the report said.

Performance in most private asset classes remained below historical averages for a second consecutive year.

Fundraising also fell 22% across private market asset classes globally to just over $1 trillion, as of year-end reported data. This marks the lowest total since 2017.

However, the report noted that headwinds did not affect all strategies or managers equally. Private equity buyout strategies posted their best fundraising year ever, raising more than $400 billion.

The report said: “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.”

Private Equity

Despite the fall in aggregate fundraising, private equity assets under management increased 8% to $8.2 trillion, according to the report.

Within that, buyouts accounted for 47% of the global total in the first half of 2023, while venture capital was 33% during the same period, up from 23% five years prior.

Regionally, buyout strategies accounted for a majority share of European and North American AUM (74% and 55%, respectively). In Asia, however, venture capital accounted for the majority of AUM, at 58%, followed by growth equity’s 23% and buyouts’ 17%.

2023 was the most concentrated fundraising year of the last decade, with 47% of all dollars raised accruing to just 25 managers.

Investors concentrated their allocations amid a broader pullback in commitments, allocations to existing managers persisted, and larger funds and their sponsors collected a greater share of capital.

Consequently, new firm formation slowed and the count of funds smaller than $250 million fell 55% to 938, the fewest since 2013.

Private Debt

Private debt topped private market asset classes in terms of fundraising growth, AUM growth, and performance, with fundraising declining just 13% year-over-year, nearly 10 percentage points less than private markets overall.

The report notes that private debt’s risk/return characteristics are well suited to the current environment. Interest rates are at their highest in more than a decade, meaning current yields in the asset class have grown more attractive on both an absolute and relative basis, particularly if higher rates are sustained and put downward pressure on equity returns.

Similarly, the built-in security derived from debt’s privileged position in the capital structure appeals to those investors who are wary of market volatility and valuation uncertainty.

However, the report found private debt was not wholly immune to the macroeconomic conditions of 2023. Fundraising declined for the second consecutive year and now sits 23% below 2021’s peak.