Fredrik Dahlqvist and David Quigley, senior partners at McKinsey, discuss private markets trends and challenges. They explore allocation strategies, tech adoption, and value creation in private equity. The guests emphasize the importance of data, technology, and talent in driving performance and generating value in assets.
Valuations and multiples are pressured by higher interest rates, leading to lower deal volumes and challenges in making commitments.
Private equity buyouts and venture capital exhibit differing performance trajectories, with buyouts seeing profits while VC investments face negative performance.
Deep dives
The Denominator Effect and Its Impact on Deal Volume
Higher interest rates and financing costs have pressured valuations and multiples in the private markets, leading to lower deal volumes. Sellers are hesitant to transact at lower multiples, resulting in fewer distributions to LPs. This has caused LPs to be overweight relative to their targets, making it challenging to make commitments at previous levels.
Contrasting Performance in Buyouts and Venture Capital
Buyouts experienced a 19% decline in deal volume, while venture capital saw a larger 36% decrease. Buyouts generated profits after a negative year, whereas VC investments faced seven consecutive quarters of negative performance. This divergence highlights contrasting fortunes in the two major sub-asset classes within private equity.
Growing Preference for Private Debt and Infrastructure
Despite a 13% decrease in fundraising, private debt remains resilient compared to other asset classes. Infrastructure faced challenges in fundraising due to concentration among a few large managers. However, a significant number of funds are currently in the market to raise over $10 billion, indicating a potential rebound.
Shift Towards Value Creation and Tech Innovation
The focus on value creation rooted in performance rather than multiple expansion is emphasized. Technology adoption remains crucial, especially in enhancing productivity and driving innovation, such as Gen.A.I. solutions. The push for technology-driven value creation is expected to reshape private markets in the coming years.
In this episode of Deal Volume, host Brian Vickery, a partner in McKinsey’s Private Equity & Principal Investors Practice, sits down with senior partners Fredrik Dahlqvist and David Quigley to discuss emerging industry trends and highlights from the 2024 edition of the firm’s Global Private Markets Review.