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Laxman Pai, Opalesque Asia: Private market assets under management (AUM) grew by 10 percent in 2019, and $4 trillion in the past decade, an increase of 170 percent, said a study.
According to McKinsey's annual review of private investing, the number of active private equity (PE) firms has more than doubled and the number of US sponsor-backed companies has increased by 60 percent during that period.
At the same time, global public market AUM has grown by roughly 100 percent, while the number of US publicly traded companies has stayed roughly flat (but is down nearly 40 percent since 2000).
The early prognosis for 2020 is for continued strength: by the end of 2019, large firms had announced targets collectively approaching $350 billion, more than at year-end 2018.
Further, limited partners (LPs) continue to raise their target allocations to private markets. Even at current levels, LPs appear to be under-allocated versus target levels by more than $500 billion in PE alone-as much as the global amount raised for PE in 2019.
PE outperformed its public market equivalents (PME) by most measures over the past decade, said the 2020 edition of McKinsey's annual review. Variability in performance remains substantial, however.
So, the challenge-and the potential-of manager selection remains paramount for institutional investors. Although the persistence of outperformance by PE firms has declined over time, making it harder to predict winners consistently, new academic research suggests that greater persistence may be found at the level of individual deal partners.
In buyouts, the deal decision-maker is about four times as predictive as the PE firm in explaining differences in performance. This finding is intuitive to many in the industry but remains tough for many LPs to act on.
Megafunds of $5 billion or more increasingly dominate buyout fundraising, making up more than half of the total in 2019. The share of funds below $1 billion has fallen to a 15-year low.
Yet paradoxically there is little evidence of any consolidation at the top of the industry. And even as the number of active PE firms continues to grow (it's now nearly 7,000), more managers are calling it quits than ever. Most of those raised just one fund, suggesting that attrition is mainly a result of one-and-done managers.
Deal volume declined in every region except North America, where the amount of capital invested rose 7 percent to $837 billion, a new high. Tech deals, up almost 40 percent, powered this growth. In parallel, the number of tech-focused private market firms has grown rapidly, while many others have tilted in that direction.
"Increasingly, we see general partners (GPs) that once had a technology "vertical" team now starting to view technology as a horizontal theme cutting across many of their deals," the report said.
US buyout multiples climbed yet again in 2019, continuing a decade-long trend, to reach nearly 12x. Leverage surpassed levels last seen in 2007.
Dry powder rose further due to record fundraising and stagnant deal volume. It now stands at a record $2.3 trillion. PE accounts for most of this total, though PE dry powder is still less than two "turns" of annual deal volume, within the range of historical norms.
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