Private markets stayed strong in 2018. True, fundraising was down 11 percent. But $778 billion of new capital flowed in, according to a McKinsey & Company report.
Investors have a new motivation to allocate to private markets: exposure. More investors believe that private markets have become effectively required for diversified participation in global growth. Global private equity (PE) net asset value grew by 18 percent in 2018; this century, it has grown by 7.5 times, twice as fast as public-market capitalization. Private markets, including PE, debt, infrastructure, real estate, and natural resources, have graduated from the fringes of the economy to the mainstream.
With growth comes maturity. In 2018, private markets continued to add flexibility, depth, and sophistication. Secondaries have scaled rapidly and made the asset class easier to access and to exit. Capital-call lines of credit have compressed the J-curve while drawing a watchful eye from some limited partners (LPs). Co-investment has shaken off concerns about adverse selection to become an effectively standard dimension of pricing. Collectively, these developments have helped the industry broaden its appeal to LPs without abandoning its underlying structures.
The industry’s conduct has changed with its context. Savvy general partners (GPs) have expanded their firms’ abilities to take advantage of today’s most prominent sources of value creation. McKinsey research shows that the 25 largest GPs all have operating teams, and most plan to expand them. Leading firms have also pioneered several digital techniques to wrest greater efficiencies in operations, deal sourcing, due diligence, and other core activities.
These are all noteworthy advances. Yet pressure continues to build in the system. Deal multiples have continued to rise — to 11.1 times, from 10.4 times in 2017 — spurred in part by record levels of dry powder, at $2.1 trillion. Deal value hit a record, but the number of deals remained relatively flat for the fourth consecutive year.
On balance, then, the industry is in fine health. Even with the slowdown, 2018 was the third-highest fund-raising year on record. And despite the flat trend in deal count, the value of PE deals reached a new high in 2018 at $1.4 trillion, finally surpassing the pre-crisis peak in 2007. That feat, along with the sharp decline in public markets in the fourth quarter of 2018, suggests that a look back at 2007 may still be in order. Whenever the next downturn comes, many in the industry are saying that lessons learned from the past crisis, deeper markets, and increasingly savvy management will help LPs and GPs alike better weather the storm.
Download the full Private markets come of age report here.