Global private asset markets soared last year as both fund-raising and assets under management hit record highs, more than offsetting a pandemic-led slowdown in 2020.
According to the latest McKinsey & Company survey of the sector, private markets assets under management (AUM) rose to US$9.8 trillion as at mid 2021 compared to US$7.4 trillion 12 months prior.
“Fundraising was up by nearly 20 percent year over year to reach a record of almost $1.2 trillion; deal makers were busier than ever, deploying more than $3.5 trillion across asset classes,” the report says. “…Dollars continued to fund higher risk-return strategies in private equity (PE) and infrastructure and rotated into riskier strategies in real estate.”
The sharp increase in private markets fund-raising last year follows a rare easing of institutional appetite in 2020 for the asset class that has seen uninterrupted annual growth in the post global financial crisis (GFC) era.
Just US$990 billion poured into private asset funds in the 2020 year compared to over US$1.1 trillion during the previous annual period. The fall was the largest since the GFC dislocation when private markets fund-raising plummeted from almost US$660 billion in 2008 to US$287 billion the following year.
But neither the GFC nor COVID appears to have quashed the growing institutional enthusiasm for non-listed assets with annual flows into the sector up more than 10-fold since the US$96 billion invested in 2003.
Despite the surge in private markets, institutional investors still remain underweight their overall asset allocation targets to the sector, the McKinsey report says.
“Over the last several years, the combination of rising targets and strong public market performance has increased the dollar gap between actual allocation and target allocation despite record commitments to private equity,” the study says.
McKinsey says institutional demand for private assets has moved beyond the early-adopters of endowment and foundation funds to include pension providers and insurers.
Historically excluded from the private asset world, retail investors are now beginning to get a foot in the door, the report says.
“Allocations [from retail investors] today remain in the low single digits, principally due to historical access constraints, but a combination of changing regulations, product innovation, and new GP [general partner] distribution capabilities is bending the penetration curve,” the paper says. “A recent survey found that over a third of private markets managers anticipated having a retail-oriented vehicle in the next five years; just 9 percent have one today.”
Private equity (PE) was the highest-performing sector among the asset class for the fifth year in a row, returning a median 19.5 per cent in 2021 followed by real estate (10.7 per cent), private debt (9.4 per cent), infrastructure (8.6 per cent) and natural resources (3.3 per cent).
“… an extended period of declining energy prices has muted returns for natural resources funds. Even with a strong year in 2021, the median net IRR to date of funds raised in 2008–18 stands at 3.3 percent, while fourth-quartile funds lost money,” the McKinsey report says. “In other words, taking commodity risk has mostly been punished.”
PE has outperformed all other private and listed asset classes since 2008, the study says, with the venture capital sub-sector providing the highest returns in eight out of the last 10 “vintage years” over the same period.
The report says private asset investors are also beginning to adapt to environmental, social and governance (ESG) challenges as well as increasingly turning to digital technology to enhance efficiency and performance.