The roller coaster ride of the private markets hit a notable dip in 2023, per McKinsey & Company’s annual deep dive. Last year, the industry saw a global fundraising decrease of 22 percent to a little over one trillion dollars, marking the lowest point since 2017. This downturn reflects broader economic pressures, from rising financing costs to market uncertainty, but there’s more to the story.
“Decade-long tailwinds from low and falling interest rates and consistently expanding multiples seem to be things of the past,” concluded the consultancy in its Global Private Markets Review 2024.
Despite the overarching gloom, private equity buyout strategies bucked the trend, notching their best fundraising year on record. This silver lining suggests a nuanced landscape, where size and strategy significantly influence outcomes. Larger funds continued to attract investment, echoing a move towards consolidation that’s been whispered about in industry corridors for years.
Assets under management in private markets still managed to climb, reaching 13.1 trillion dollars by mid-2023, with dry powder reserves swelling to 3.7 trillion dollars. This growth, however, didn’t translate into performance gains. Across the board, asset classes struggled to hit their historical performance marks for the second year running, signaling an end to the low-interest rate and expanding multiples heyday.
Shifting investor base
McKinsey’s review also highlights a shifting investor base. With institutional investors caught overallocated thanks to the “denominator effect,” non-institutional capital is starting to play a bigger role. Although it’s still early days, the engagement of high net worth and retail investors is on the up, signaling a broadening of the sector’s capital sources.
The potential of artificial intelligence (AI) in reshaping private markets also received a nod. From improving deal sourcing to optimizing portfolio performance, AI’s role is growing, hinting at a tech-led evolution in how the industry operates.
Industry at a crossroads
But it’s not all smooth sailing. Real estate and venture capital sectors felt the economic squeeze particularly acutely, with both areas seeing marked downturns in activity and fundraising. In contrast, private debt stands out as a beacon of resilience, offering some stability in an otherwise turbulent market.
As for what lies ahead, McKinsey’s report paints a picture of an industry at a crossroads. The immediate challenges of a sluggish fundraising environment and below-par performance are clear. Yet, the undercurrents — from the rise of non-institutional capital to the embrace of AI and ongoing consolidation — hint at a sector that’s rapidly evolving, potentially setting the stage for a rebound as market conditions stabilize.
In the end, the report underscores a key theme: adaptation. As private markets navigate through economic headwinds and structural shifts, flexibility and innovation seem to be the name of the game. Whether this will translate into a swift recovery or a longer period of adjustment remains to be seen.
Private debt fundraising became more concentrated in 2023
Further reading on Investment Officer Luxembourg:
- McKinsey: private bank profitability declines again
- Outlook 2024: For private markets it’s back to basics
- ‘Investors don’t need private markets’