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Banking and Finance

Private markets looking to the future after decade of steady growth

McKinsey & Company published its Global Private Markets Review 2020, a comprehensive analysis of the dynamics and performance of the private investing industry.

Entitled A new decade for private markets, the report, which explores private equity, real estate, infrastructure, natural resources, and private debt, finds the industry completing a decade of growth with another strong year: in 2019, the industry raised $919 billion, close to 2018’s record levels, topping off ten years in which fundraising more than doubled the amount raised in the previous decade.

European firms had a strong year in fundraising, say authors of the report, with funds raised up 8 percent in 2019, relative to the year before.

BRYCE KLEMPNER

Meanwhile, fundraising was down slightly in North America, and more dramatically in Asia, which declined 25 percent, as dry powder in the region increased and exits proved challenging.

While private equity deal volume remained at similar levels to 2018, after years of growth, and deal count fell slightly, the average deal size rose to $157 million (25 percent higher than five years ago) – a reflection of how megafunds have become the new normal.

McKinsey’s research finds PE deal multiples have risen, from about 11x in 2018 to nearly 12x in 2019 on a trailing two-year basis, and that the use of leverage has grown as well, surpassing pre-crisis levels for the first time.

Private markets dry powder has also risen to a new record of $2.3 trillion (as of June 2019), up $200 billion since year-end.

Private equity comprises the bulk of that total, though PE dry powder is still less than two times trailing 3-year average deal volume.

Matt Portner, partner, McKinsey & Company, and co-author of the report, said: “Private markets are on a strong footing. Assets under management hit $6.5 trillion, and fundraising targets for 2020 are larger than this time last year. Given strong returns, LPs continue to raise allocations to private markets. And yet LPs are still under-allocated against their own target levels by more than $500 billion in PE alone — so we expect strong inflows to continue.”

While examining shifts in the private markets, the report also explores how firms are focusing on transforming themselves to keep pace with the times and sharpen their edge.

In the face of increasing LP demand and research suggesting that use of ESG factors may improve returns, some firms have begun integrating ESG considerations throughout the deal cycle and raising dedicated impact-focused vehicles.

On one ESG dimension, however, the industry as a whole has yet to make much progress, the report concludes: diversity and inclusion is still lacking at most private markets firms.

This is despite research indicating that greater representation by women on deal teams may enhance returns. The report anticipates more meaningful shifts in this area going forward – in particular, as LPs increasingly put their money where their mouths are.

The report also explores the advancing role of digital tools in private markets investing. As more firms build data science and analytics teams, new approaches to deal sourcing and value creation will become more prevalent.

Bryce Klempner, partner, McKinsey & Company, and co-author of the report, said:

“The private markets industry has been a pathbreaker in many ways, pioneering new financial tools and popularizing reliable approaches to value creation. Yet even as firms push digital transformation into their portfolios, most have been slow to adopt technological change in their own operations.

“And though ESG reporting has become more prevalent, most firms have considerable room to improve in integrating ESG factors across their investing processes and in how they run themselves. They’re now playing catch-up to public markets firms in these areas.”

A final chapter looks ahead to how GPs are preparing for a potential downturn.

McKinsey research points to a number of tactical steps GPs can take across their operations and portfolio to increase resiliency in a recession.

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