How private market managers delivered another banner year – and why it’s unlikely to happen again in 2022

By any measure, private markets had a monumental year in 2021.

Fundraising hit an all-time high of nearly $1.2 trillion last year, an increase of nearly 20% from 2020, according to McKinsey’s latest private markets report. In private equity alone, the annual number of deals topped 14,000 for the first time, generating $2.04 trillion in global deal volume. In July, assets under management for global private market investors hit a record high of $9.8 trillion, up from $7.4 trillion a year earlier, the report said.

The pent-up demand for transactions caused by the pandemic is not the only reason for the record activity. Matt Portner, who co-heads McKinsey’s global private markets research, said investors’ constant search for yield was another key driver. “Returns have been much harder to come by in traditional sources,” he said. This has prompted institutional investors like pension funds and sovereign wealth funds to explore opportunities in the private space, where return expectations are generally higher.

Private equity funds, for example, have outperformed most of their public market counterparts since 2009, according to the report. In 2021, they generated an internal rate of return of 27%, the highest of any private asset class. Private Credit has also provided “dependable low volatility returns that outperform fixed income alternatives” with an average ofIRR of 10.1% in the first three quarters of 2021, according to McKinsey.

The rise of growth equity funds has also helped propel activity in private markets to new heights. Assets invested in growth equity funds, which invest in relatively mature private companies, have grown at a compound annual growth rate of 4.2% over the past five years, as traditionally venture capital and private equity are moving in space. Blackstone, for example, closed its first $4.5 billion growth equity fund in March 2021. Over the past ten years, six of the top ten buyout managers have launched a growth investment vehicle , according to the report.

According to McKinsey, companies traditionally focused on venture capital accounted for 16% of growth equity fundraisings last year, while buyout firms accounted for 12%.

One of the reasons private market investors turn to early-stage investing is to avoid short-term IPOs amid heightened volatility. According to Tiffany Hsiao, managing director of investment manager Artisan Partners, China’s regulatory crackdown has driven development-stage money into growth-stage and early-stage companies. “Investors know that if they are late-stage investing, they will soon be facing an IPO, she said. “The market just wasn’t ready for many IPOs.”

With companies remaining private longer than ever, there is also an expanding universe of growth-stage companies available for investment. According to McKinsey, growth “stands out as a natural next frontier” as traditional buyout managers seek to increase their product offering.

In addition to designing new products, the most successful fundraisers also “expanded their flagship products and collected more frequently,” McKinsey said. The amount of capital accumulated by the top 20 fundraisers has grown from $160 billion in 2016 to $550 billion in 2021. They have also raised funds “almost twice as fast” in the past five years, according to The report.

The fundraising success of the biggest companies does not imply less competition among private market asset managers, according to Portner. In fact, “there are so many new companies being introduced to the market [that] there has actually been no greater consolidation over time,” he said. Brian Vickery, a partner at McKinsey and co-author of the report, added that “the consolidation just wasn’t showing up in the data” even after the research team specifically tried to disentangle it.

Looking to the outlook for 2022, the authors questioned the sustainability of such an unprecedented level of activity in private markets. “A new set of risks emerged in early 2022 with the potential to undermine growth and performance,” the report said. “The Russian government’s invasion of Ukraine, rising inflation and interest rates, as well as supply chain and labor issues are already increasing volatility three months into of the new year.”

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