Fund raising in private markets across all asset classes globally fell 22% in 2023, to just over $1 trillion, the lowest total since 2017, weighed down by the so-called “denominator effect,” which persisted due to a reduction in activity in the trading market.

This is one of the data provided by the consulting firm McKinsey

In North America, fundraising decreased in line with global figures, while Europe was more resilient, experiencing a drop of just 3%. In Asia, fundraising plummeted and is currently 72% below its peak in 2018.

In 2023, fundraising, trading activity and private markets results remained under pressure, although there were some notable exceptions across strategies and regions, according to McKinsey. For example, private equity buyout strategies recorded their best fundraising year ever, and larger managers and vehicles also did well.

Macroeconomic difficulties continued throughout the year, with rising financing costs and uncertain growth prospects affecting private markets.

Managers largely held on to assets to avoid selling them in an environment of lower multiples, fueling a cycle of declining activity in which limited partners put the brakes on new commitments.

Furthermore, in most private asset classes, performance in 2023 remained below historical averages for the second year in a row. McKinsey believes that in this new era of investing, it will be “more necessary than ever” for private markets managers to focus on revenue growth and margin expansion.

One of the key findings of the report is that, despite a marked recovery in the denominator, many limited partners remain overexposed to the private markets relative to their target allocations.

Average allocations to private equity, infrastructure and real estate were at or above target allocations in early 2023, with the numerator growing over the year as a lack of exits and a rally in valuations meant net asset values ​​will increase. Despite everything, recent studies show that the majority of limited partners remain committed to private markets.

Elsewhere, McKinsey has noted that fundraising concentration has reached its highest level in more than a decade, as investors have continued to shift new commitments to larger fund managers. Larger funds grew even more, while smaller, newer funds struggled.

The report also indicates that dry powder reserves (the capital committed but not yet deployed) increased for the ninth consecutive year, reaching $3.7 trillion, and that dry powder inventory (the capital available to general partners expressed as a multiple of annual deployment) rose for the second consecutive year in private equity.

On the other hand, buyout and private equity, the two main subclasses of private equity, behaved very differently over the last 18 months. In the case of the ‘buyout’, 2023 was the year with the highest fundraising and its performance improved; In contrast, venture capital fundraising fell by almost 60%, matching its lowest total since 2015.

McKinsey analysis also indicates that entry multiples for private equity purchases fell from 11.9 to 11.0 times EBITDA (gross operating profit calculated before deducting financial expenses) in the first nine months of 2023.

Regarding the real estate sector, the consultancy points out that uncertainty in demand, the slowdown in rental growth and high financing costs raised maximum rates and made it difficult to determine prices, and all of this negatively affected the volume of operations. fundraising and investment performance.

It was also not a good year for infrastructure and natural resources, an area in which, after several years of strong growth and good results, fundraising fell by 53%, equaling the lowest total since 2013. However, Limited partners surveyed by McKinsey remain optimistic about this asset class.

Finally, private debt remained the most resilient private asset class in a turbulent market environment: fundraising decreased by only 13% and the highest returns of all asset classes were achieved through September 30.

Two other issues that the consulting firm’s analysis highlights are the transformative potential of generative artificial intelligence, which can help optimize thesis generation, transaction search, investment due diligence and portfolio performance, and need to continue improving diversity in private markets, increasing the representation of women and ethnic and racial minorities.