Private markets entered a slower era in 2023, says McKinsey

Global report highlights factors that led to a less active market

Private markets entered a slower era in 2023, says McKinsey
Steve Randall

Global private markets faced a slowdown in 2023 with rising financing costs and an uncertain growth outlook weighing on activity.

A new report from McKinsey highlights that “performance in most private asset classes remained below historical averages for a second consecutive year,” as the market tried to reset from decades of low interest rates and expanding multiples.

Fundraising fell 22% across private market asset classes to just above US$1 trillion by year end, according to reported data. This was the lowest total since 2017 and North America did not escape the global decline. Europe was the most resilient.  

Managers will need to have a keen focus on revenue growth and margin expansion to boost market growth, the report says.

However, despite the challenges, McKinsey’s analysis in partnership with global private markets firm StepStone Group found that LPs are still committed to private markets with many planning to increase allocations.

Bigger names in the private markets space are taking a larger share of fundraising with 41% of aggregate commitments to closed-end funds centred on the 25 most successful fundraisers and half of the total going to just the top five managers.

This focus on larger funds was detrimental to smaller players, with a halving of the number of funds with less than $1 billion that closed in 2023 compared to 2022 to less than 1,700.

The analysis also shows a continued rise in the dry powder available to GPs - $3.7 trillion as of June 30, 2023.

Divergence in PE

There was divergence in the private equity segment of private markets with buyouts recording a record high for fundraising in a single year despite a decline of 19% in the volume of deals (it was still the third highest on record).

Meanwhile, there was a 60% slump for venture capital fundraising with deal volume down by more than a third to the lowest level since 2019.

Real estate fundraising was also weaker in 2023 with global closed-end fundraising down 34% percent year-over-year. With funds returning 4% in the first nine months of the year the sector lost money for the first time since the 2007–08 global financial crisis. There was a 53% drop for infrastructure fundraising as investors avoided core and core plus investments, as was the case for real estate.

Conversely, private debt was more resilient with only a 13% decline in fundraising. With many of these securities positively impacted in a rising rate environment, better returns are keeping investors interested.

Overall, the report concludes that “if private markets investors entered 2023 hoping for a return to the heady days of 2021, they likely left the year disappointed.”