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The Music Didn't Stop, but Someone Turned it Way Down

According to our latest Global Private Markets Review

Private markets faced a year of two halves in 2022, with buoyancy in the first half and plummeting deal volumes, declining performance, and falling valuations in the second.

Since the depths of the Global Financial Crisis (GFC). Interest rates stayed low, credit availability was high, and valuations rose consistently. Each year since its inception, this annual publication has discussed new records in fundraising and deal flow while celebrating strong performance across asset classes. Even in 2020, when activity stalled briefly during the early months of the COVID-19 pandemic, private markets hummed again in the second half. In almost every regard, 2021 was an exceptional year (as we highlighted in last year’s report) but it was not a trend breaker. Markets climbed higher still, awash with central-bank-induced liquidity. In the first half of 2022, central banks fought roaring inflation by sharply raising interest rates, and public market valuations cratered. In the private markets, first-half deal activity softened but subtly so, nearly matching the record-setting pace set in 2021.

The mood changed in early summer. Banks began to pull back, unwilling or unable to lend. Private markets deal volume plummeted, performance declined, and valuations fell—dramatically in certain sectors. Still, private markets outperformed public markets on the way down, whether due to truly more resilient portfolios, a lag in timing, or manager discretion over their marks (private markets tend to mark up less quickly during ascending markets and mark down less quickly in falling markets). The discrepancy this year drove private market allocations higher on a percentage basis across institutional portfolios—closer to preexisting targets for most, and above targets for many limited partners (LPs)—triggering the so-called denominator effect. Though few LPs thus far have abandoned commitment plans entirely or sold portfolios as they did 15 years ago, many have pulled back, particularly from smaller and newer funds, causing fundraising to decline.

Deal Making Slowed in the Second Half

After a frenzied 2021, private equity (PE) deal volume decreased 26 percent to $2.4 trillion, while deal count fell 15 percent to just under 60,000. The deal-making momentum of 2021 continued through the first half of 2022, and despite the striking slowdown in second-half deal activity, 2022 remained the second most active year on record. The number of buyout and growth deals greater than $500 million decreased by 33 percent. Add-on deals, which tend to be smaller, continued to gain share as a percentage of total deals. New platforms comprised 28 percent of total transactions in 2022, 14 percentage points lower than five years ago.

Real estate deal volume declined 20 percent to $1.1 trillion, also the second-highest year on record. Like PE deal making, first-half real estate deal making continued close to the record-setting pace of the second half of 2021, but second-half volumes declined precipitously. After more than doubling year over year in 2021, multifamily deal volume fell 29 percent in 2022, accounting for nearly half of the asset class’s overall decline in deal activity.

The Denominator Effect Took Hold

Global private markets fundraising declined by 11 percent to $1.2 trillion. Real estate (−23 percent) and private equity (−15 percent) declined most precipitously from 2021’s record highs, while private credit (+2 percent) proved more resilient. Macroeconomic headwinds, including rising inflation and interest rates, coupled with negative public market performance (−17.7 percent) triggered the aforementioned denominator effect, and LPs scaled down new commitments. Despite these challenges, 2022 is likely to be the second-best fundraising year on record (after all data is reported), demonstrating—thus far—discipline and longer-term thinking by LPs.

Investors Fled to Known Names and Larger Funds

Amid a pullback in commitments, an outsized share of capital flowed to the largest funds, as investors re-upped with their existing managers but reduced backing smaller and new funds. Funds over $5 billion collected a record $445 billion in aggregate, a 51 percent increase over funds of a similar size in 2021. Conversely, dollars raised by sub–$5 billion funds decreased by 28 percent. Just 2,141 funds were closed during the year, 1,600 fewer than in 2021 and the fewest of any year since 2013. First-time fund launches also decreased by 40 percent.

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McKinsey Global Private Markets Review 2023 _ McKinsey
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