Earlier this year McKinsey & Company released their 2023 Global Private Markets Review. However, McKinsey’s report is LONG, clocking in at 74 pages, so we’ve shared some key highlights from the report below. Last year when we published our overview of McKinsey's 2022 report and we were excited to get our hands on the 2023 edition and found some of the similarities and differences in these reports fascinating.
You can read the full report here or via the link in the footnotes if you’re interested.
Decline in PE & VC activity
While in 2021, PE & VC bounced back strongly from the 2020 pandemic-driven dip, but in 2022 there was a return to normalcy. The pace of deal activity slowed in 2022 as funds were more hesitant to deploy capital amid softening markets. Buyout and growth deals greater than $500 million decreased by 33 percent, while smaller add-on deals continued to gain share. Additionally, new platforms comprised 28 percent of total transactions, which was 14 percentage points lower than five years ago. Private equity deal volume in the second half of 2022 decreased by 26 percent to $2.4 trillion, while deal count fell 15 percent to just under 60,000.
Surge in private debt activity
Private debt and credit have become increasingly popular in 2022, likely in part due to their perceived stability during times of market instability. Given that debt sits higher on the priority of payments and typically disburses cash to the bondholders at regular intervals, it is seen as less volatile than equity, especially riskier, early-stage equity investments. The discrepancy in private equity and private debt returns this past year has also been a boon to private debt fundraising which saw its best year on record in 2022. However, it is investor beware in the long run as boons in fundraising can also drive prices higher and therefor returns lower in the long run.
2022 was a bad year for returns
In 2022, PE as a whole experienced negative performance for the first time since the global financial crisis of 2008. That being said, PE still outperformed public equities in the form of the S&P (see below). Overall, global PE performance recorded a -9 percent return through September, marking the end of a five-year period where PE had been the highest-performing private asset class. For the first time since 2017, VC underperformed buyout funds.
Interestingly, the significance of manager selection in determining performance diminished in 2022. The interquartile spread of returns, which measures the range of returns between the top and bottom-performing PE funds, narrowed to 21.6 percent in 2022. While still a significant figure, this was notably lower than the prior ten-year average of 33.8 percent.
Forward-looking thoughts from McKinsey
Rise of non-institutional investors: Private markets are becoming increasingly accessible to more individuals as regulatory changes and novel investment vehicle structures open private investment opportunities to everyday investors. Expect this to be a bigger deal in the coming years.
Record dry powder: PE dry powder reached highs of roughly $1.9 trillion (see below). Dry powder inventory on hand was 1.4 years, up from 0.9 years in 2021. This will have implications for capital deployment and potentially even returns in future years.
ESG AUM is growing: With the growing significance of ESG in the corporate world, ESG-focused funds (such as climate tech funds) have seen significant capital inflows. In 2022, ESG AUM exceeded $100b for the first time, growing at 35% per year over the last decade and outpacing most of the market.