McKinsey & Company’s recently released Global Private Markets Review reveals that private markets slowed in 2023. The report points to macroeconomic headwinds, an increase in financing costs, and uncertainty in the growth outlook as contributors, which affects fundraising, deal activity, and performance.
According to the report, macroeconomic headwinds persisted throughout 2023. An increase in financing costs combined with an uncertain growth outlook put pressure on private markets. The report notes that full-year fundraising continued to drop from the highs experienced in 2021. Fundraising plummeted 22% across private market asset classes globally, decreasing to just over $1 trillion, the lowest since 2017.
The report highlights that the 1,000 largest U.S. retirement funds grew 7%, a rebound following a 14% decline in the previous year. "Many LPs continue to be overexposed to private market," McKinsey states in the report. It points out that LPs began the year "overweight"; citing an analysis from CEM Benchmarking, the average allocations across PE (private equity), infrastructure, and real estate were near or above target allocations at the start of 2023. Still, McKinsey looks to recent surveys that show LPs remain broadly committed to private markets—and most intend on maintaining or increasing allocations over the medium to long term.
The report also examines trends in the real estate market, such as demand uncertainty, slowing rent growth, and higher financing costs, and how they have pushed cap rates upward. Global closed-end fundraising decreased 34% year over year, while funds returned −4% over the first nine months of the year.
In addition to real estate trends, McKinsey states that the transformative potential of generative AI was the year’s hottest topic. "Private markets players are excited about the potential for the technology to optimize their approach to thesis generation, deal sourcing, investment due diligence, and portfolio performance, among other areas," McKinsey states. "While the technology is still nascent and few GPs can boast scaled implementations, pilot programs are already in flight across the industry, particularly within portfolio companies. Adoption seems nearly certain to accelerate throughout 2024."