The latest McKinsey Global Private Markets Review for 2019 highlights some of the key themes for our global industry and the ways in which our industry’s role is changing to meet the needs of institutional investors.
The report, which draws on Preqin data, shows that private markets are going more mainstream, growing sevenfold in the years since 2002 and twice as fast as global public equities. With this development comes the necessity to create new structures, such as long-duration funds, as funds look to be more flexible and accommodating to a range of investors.
Beyond providing exposure to alternative assets, private markets also offer flexibility, depth and sophistication.
Since the pre-GFC days of 2007, the market has doubled, new players have entered, dry powder has increased and the average deal size has been getting smaller. The experience of the past has also prepared the market for another downturn should it occur.
It’s worthwhile taking a look at where that growth in private markets has come from.
Private market AUM reached an all-time record of $5.8 trillion in 2018, with private equity accounting for just over half the total and venture capital playing a key role in this increase, growing at 18% p.a. since 2010.
Infrastructure fundraising is gaining ground - increasing 17% globally - which is not surprising given the Global Infrastructure Initiative estimates that $4 trillion of annual investment is required until 2035 to keep pace with economic growth. This is backed up by a growing increase in spending on roads, bridges, tunnels and airports in both developing and developed nations. However, this growth in fundraising is driven mostly by North America and Europe with infrastructure fundraising in Asia down 23% for the year, signalling an end to the China-led infrastructure boom in the Asia region.
Private credit fundraising was down 15% on the previous year but the growth trajectory still looks strong in this sustained period of low interest rates, where private credit can fill the void being left by banks in corporate lending, particularly for smaller companies.
When we look at fundraising in the Asia region, this has grown 7% per year on average but in 2018 fundraising by Asia-based managers nearly halved while those raising Asia-targeted funds raised a healthy $41 billion. This may have been down to tighter regulation in China and trade tensions with the US.
Now that we know the stats, let’s look at how these changes might take shape at an operational level within investor firms.
- Streamlining internal functions and navigating a new generation of leaders – many firms will start to take a more traditional institutional asset management approach to decision making and fundraising rather than a founder-led approach.
- Bringing digital efficiencies to in-house operations - digitising contact management with sophisticated CRM systems, using AI and Natural Language Processing to pull data which adds value to a portfolio and improves due diligence.
- Meeting changing institutional investor demand with new products and services – secondary funds, long-duration funds and capital call lines of credit are being called out as just some of the new products which could be developed over the coming years to cater to demand for differentiated exposure and greater flexibility.
- Taking a more relationship-based approach – by focusing on the client’s journey through various interactions with a fund manager and how this impacts on their experience.
While this data and its insights reflect a global marketplace, it’s interesting to see how more sophisticated markets have grown over the decade and to see how these trends and changes trickle down into the local industry and to different market participants.