Our ongoing research on the industry’s dynamics and performance has revealed several insights, including the following trends:

Macroeconomic challenges continued. If 2022 was a tale of two halves, with robust fundraising and deal activity in the first six months followed by a slowdown in the second half, then 2023 might be considered a tale of one whole. Macroeconomic headwinds persisted throughout the year, with rising financing costs and an uncertain growth outlook taking a toll on private markets. Full-year fundraising continued to decline from 2021’s lofty peak, weighed down by the “denominator effect” that persisted

in part due to a less active deal market. Managers largely held onto assets to avoid selling in a lower-multiple environment, fueling an activity-dampening cycle in which distribution-starved limited partners (LPs) reined in new commitments.

Performance in most private asset classes remained below historical averages for a second consecutive year. Decade-long tailwinds from low and falling interest rates and consistently expanding multiples seem to be things of the past. As private market managers look to boost performance in this new era of investing, a deeper focus on revenue growth and margin expansion will be needed now more than ever.

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The year 2023 was one of portent. Deal value fell by 37%. Exit value slid even more, by 44%. Fund-raising dropped across private capital, as 38% fewer buyout funds closed. Interestingly, dollar commitments in buyouts surged as a number of high-performing funds came to market. But it was truly a year of haves and have-nots. Just 20 funds accounted for more than half of all buyout capital raised. Yet what’s driving these declines couldn’t be more dissimilar to what was happening in 2008–09, and making sense of it requires a different lens altogether. 

As difficult as it was, the aftermath of the GFC followed a predictable pattern: To cope with the crisis, central bankers slashed interest rates to spur activity, the economy slowly stabilized, and private equity was able to claw its way back from what many predicted would be its unraveling. The resulting period of growth in the years that followed created a private equity industry that is vastly larger and more complex than anyone in 2008 could have reasonably expected. 

Yet today that size and complexity magnify the challenges the industry faces. Business conditions are more perplexing than predictable. Interest rates have risen faster than at any time since the 1980s, and it remains unclear when the US Federal Reserve will reverse course or where rates will eventually settle. Concerns about what we dubbed last year “the most anticipated recession in history that hasn’t happened yet” continue to linger. Yet to the surprise of most analysts, the economy is chugging along nicely. Record-low unemployment, reasonable growth, and surging public markets in the US suggest the possibility that we might just escape these months of turmoil with nothing worse than a soft landing. 

These crossed signals have left private equity hamstrung. The sheer velocity of the interest rate shock was something few in the industry had ever experienced, and the impact on value has driven a wedge between buyers and sellers.

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Welcome to the 2023 edition of McKinsey’s annual review of private markets investing. Our ongoing research on the industry’s dynamics and performance has revealed several insights, including the following trends:

The music didn’t stop, but someone turned it way down. Private markets have enjoyed strong tailwinds 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, 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 with sharply rising 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. 

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It’s safe to say the private equity industry has never seen anything quite like what’s happened over the last 24 months. While the sharp drop-off in deal activity in late 2022 and into 2023 echoes the period following the 2008–09 global financial crisis (GFC), the situation the industry faces today is largely unprecedented. The numbers are all very GFC-like: Deal value and deal count have fallen 60% and 35%, respectively, from their peaks in 2021. Exit value is down 66%, and the number of funds closing is off by nearly 55%.

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Welcome to the 2022 edition of McKinsey’s annual review of private markets investing. Our ongoing research on the industry’s dynamics and performance has revealed several insights, including the following trends: 

Private markets bounced back in 2021. After a year of pandemic-driven turbulence that suppressed fundraising and deal activity, private markets rebounded across the board. 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; and assets under management (AUM) grew to an all-time high of $9.8 trillion as of July, up from $7.4 trillion the year before. Dollars continued to fund higher risk-return strategies in private equity (PE) and infrastructure and rotated into riskier strategies in real estate.

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By just about any measure, private equity set a remarkable new standard for itself in 2021. Buyout deal value and exits shot to stunning new records. General partners (GPs) had the secondbest fund-raising year in the industry’s history, capping a five-year run that has netted $1.8 trillion in new buyout capital (see Figure 1). Funds boosted distributions to limited partners (LPs) and continued to deliver returns outpacing any other asset class. All in all—and despite the continued economic uncertainty brought on by the Covid-19 pandemic—private equity put a bold exclamation point on what has turned out to be a decade of outstanding performance.

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Fitch Ratings-New York-22 November 2021: Private equity (PE) collateralized fund obligations (CFOs) rated by Fitch Ratings have exhibited stable performance since recovering from the coronavirus-driven economic downturn and market volatility, with cash flows and loan-to-value ratio measures returning to pre-pandemic levels or better. Driving this performance are significantly improved market conditions and the transactions’ structural features, such as de-leveraging mechanisms.

One PE CFO was issued in 2021 (Astrea VI, in March 2021), a figure similar to 2020. Uncertainty caused by regulatory proposals as well as the pandemic-driven market volatility has hampered issuance in both years. As the pandemic recedes and regulators provide additional clarity, the market may rebound in 2022.

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Private equity (PE) collateralized fund obligations (CFOs) rated by Fitch Ratings have exhibited stable performance since recovering from the coronavirus-driven economic downturn and market volatility, with cash flows and loan-to-value ratio (LTV) measures returning to pre-pandemic levels or better. Driving this performance are significantly improved market conditions and the transactions’ structural features, such as de-leveraging mechanisms. Transaction-specific charts and tables on pages 4-6 provide additional details.One PE CFO was issued in 2021 (Astrea VI, in March 2021), a figure similar to 2020. Uncertainty caused by regulatory proposals as well as the pandemic-driven market volatility have hampered issuance in both years. As the pandemic recedes and regulators provide additional clarity, the market may rebound in 2022. Fitch expects that PE CFO ratings will remain stable in 2022, while some tranches could be upgraded if they continue deleveraging. Transactions’ performance will be driven by expected global economic growth. Fitch expects active capital markets and PE funds’ exit activity to generate consistent cash flows and support liquidity for Fitch-rated PE CFOs, although a market dislocation could pause this trend.

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The year 2020 was turbulent for private markets, as it was for much of the world. We typically assess meaningful change in the industry over years or decades, but the pandemic and other events spurred reassessment on a quarterly or even monthly basis. Following a second-quarter “COVID correction” comparable to that seen in public markets, private markets have since experienced their own version of a K-shaped recovery: a vigorous rebound in private equity contrasting with malaise in real estate; a tailwind for private credit but a headwind for natural resources and infrastructure.

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It was a year of massive disruption—and private equity emerged unscathed.

Despite the tragic Covid-19 pandemic and its global economic fallout, despite the protests against police brutality and systemic racism and months of social upheaval, despite a bitterly contested US presidential election that ultimately led to an unprecedented mob assault on Capitol Hill, dealmakers kept making deals in 2020, while exits and fund-raising fell in line with robust five-year averages.

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