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 (LPs) and General Partners (GPs) 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.
Bryce Klempner, Partner, McKinsey & Company, and co-author of the report, said: “The big story in 2017 was about scale. Megafunds raised more than twice as much in 2017 as the year before. 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.”
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.
Aly Jeddy, Senior Partner, McKinsey & Company, and co-author of the report, said: “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. 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.”
Jeddy continued: “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’.”
Interesting statistics (including regional differences):
• The rise of US megafunds was nearly matched in Europe, where several firms successfully closed big new funds totalling $40 billion; and in Asia, where mega funds–previously close to non-existent–contributed more than $20 billion of the $60 billion raised in 2017.
• Despite the strong showing of megafunds in Europe, however, total fundraising slowed –growing at just 2% in 2016-2017, well below the 21% rate of the previous 5 years.
• In private equity deal volume, Asia led the charge: it jumped 96%, to $110 billion. Europe grew impressively, at 30%. North American deal volume barely budged, rising 1%, to $641 billion.
• Regarding deal count, every region suffered. In the U.S., deal count dropped by 6%, continuing a decline that began in 2015. Europe experienced a sharper decline, with
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deals falling 11%. Asia fell slightly, by 4%, but the largest fall was in Africa and Latin America, which fell 14%, to about 390 deals.
• Continuing the trend that started in 2011, distributions to LPs exceeded capital calls; in the first half of 2017, GPs returned $100 billion more to LPs than they called in (about 30% more returned than called in).
Fundraising figures, broken down by region and asset classes:
About McKinsey & Company
McKinsey & Company is a global management consulting firm, deeply committed to helping institutions in the private, public, and social sectors achieve lasting success. For 90 years, our primary objective has been to serve as our clients' most trusted external advisor. With consultants in over 120 cities in over 60 countries, across industries and functions, we bring unparalleled expertise to clients anywhere in the world. We work closely with teams at all levels of an organization to shape winning strategies, mobilize for change, build capabilities and drive successful execution.
About McKinsey’s private equity and principal investors team
McKinsey’s Private Equity and Principal Investors Practice is the leading management consulting partner to the private equity industry and its stakeholders. McKinsey’s work spans the full investment cycle, including pre-financing, sourcing strategies, commercial due diligence, post-investment performance transformation, portfolio review, and buyout/exit strategy. McKinsey has a global network of experienced private equity advisors and professionals from all industries and functions who serve private equity clients around the world. For further information about the Practice, please visit www.mckinsey.com/industries/private-equity-and-principal-investors.
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