McKinsey Private Equity report: 'Falling interest rates and rising multiples are a thing of the past.'
Management consultancy McKinsey & Company maps this development in the latest edition of the Private Markets Review.
'Private markets turn down the volume' was the title of the Private Markets Review of the management consultancy firm McKinsey & Company last year. This year it is 'Private Markets: a slower era'.
A new era for private equity has begun
The cover of the report shows an emaciated tree, bent by the persistent wind from one direction. It will be the macroeconomic headwind that private equity parties and other unlisted capital providers face, or the rising financing costs and uncertain growth prospects. “Decades of tailwinds of low and falling interest rates and consistently rising multiples appear to be a thing of the past”, the report notes.
Whether that is the case remains to be seen. But the sector did indeed face several challenges in 2023, and this is clear from the report. High interest rates and other issues that wreaked havoc in the second half of 2022 continued into 2023, making it harder for the industry around the world to raise capital and close deals while business economic performance remains under pressure remained standing.
In relation to the high interest rates (read: high financing costs), the multiples were low; a rally like that on the stock exchanges was delayed in the private markets. As a result, many parties were reluctant to make an exit. Which in turn contributed to their difficulty in raising capital.
Especially the latter: according to the report, no less than 22 percent less capital flowed into the sector in 2023 than in 2022 – just over one trillion dollars. This is the largest decline since 2009. At the same time, the value of assets under management (AUM) increased, partly because there were so few exits: by 12 percent to 13.1 trillion dollars (as of June 30, 2023). Dry powder reserves – the amount of capital committed but not yet deployed – increased to $3.7 trillion.
Europe as an exception
As every year, there were exceptions to these general trends. For example, one part of the world did better than the other. In Asia, for example, the amount of capital that the sector managed to attract fell by 44 percent, partly due to unfortunate government intervention, according to the report.
Europe did wonderfully well with the sector raising 243 billion dollars, just 3 percent less than the previous year. Although this “apparent resilience of the region” is somewhat “illusory” according to the report: “Fundraising in the region fell by 24 percent the previous year and is now 27 percent below the record of 2021.”
Less money to private equity
Within the sector, certain segments also performed better than others. The report takes a closer look at developments in private equity, real estate, private debt and infrastructure and among their capital providers. Each of these sub-sectors is discussed in more detail in the report. The second chapter, for example, is about developments in private equity. As elsewhere, PE funds struggled to raise capital; fundraising fell for the second year in a row, by 15 percent to 649 billion dollars.
Buyout funds escaped this decline: they were even more successful than ever before, raising 424 billion dollars. Growth capital and venture capital, on the other hand, were in the corner where the blows fell. Growth capital fell 30 percent to 117 billion dollars.
Decreased performance, fewer deals
Although the PE sector raised less money, the value of assets under management increased – at least on paper – by eight percent to 8.2 trillion dollars. Only a small part of this growth was driven by good business performance: PE funds had an effective rate of return (IRR) of just 2.5 percent (until September 30, 2023).
Buyouts and growth capital generated positive returns, while VC lost money
As elsewhere in the private capital market, deal volume and the number of deals plummeted. “After a hectic 2021, which saw volume peak at a record high of 3.4 trillion dollars and robust activity in the first half of 2022, dealmaking became more difficult in the second half of 2022. That slower pace continued into 2023, with deal volume totaling 2.1 trillion dollars, down 21 percent from the previous year and 38 percent below the 2021 peak. The number of deals fell even more sharply, down 24 percent to fewer than 54,000.”
