How Private Market Managers Delivered Another Record Year — And Why It’s Not Likely to Repeat in 2022

The rise of growth equity contributed to all-time-high fundraising in 2021, but uncertainty looms as geopolitical tensions and macroeconomic trends pose new challenges.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

By all measures, private markets had a monumental year in 2021.

Fundraising reached a record high of almost $1.2 trillion last year, an increase of nearly 20 percent from 2020, according to McKinsey’s latest private markets report. In the private equity space alone, the annual deal count surpassed 14,000 for the first time, generating $2.04 trillion in deal volume globally. As of July, the assets under management of global private market investors had hit an all-time high of $9.8 trillion, up from $7.4 trillion the year before, according to the report.

Pent-up demand for deal-making caused by the pandemic isn’t the only reason for record activity. Matt Portner, who who co-leads McKinsey’s global research on private markets, said the constant search for yield by investors was another key driver. “Yields have been a lot harder to come by in traditional sources,” he said. That has prompted institutional investors like pension funds and sovereign wealth funds to explore opportunities in the private space, where return expectations are usually higher.

Private equity funds, for example, have outperformed most of their public market counterparts since 2009, according to the report. In 2021, they generated an internal rate of return of 27 percent, the highest among all private asset classes. Private credit also delivered “reliable low-volatility returns that exceed fixed-income alternatives” with an average of 10.1 percent IRR in the first three quarters of 2021, according to McKinsey.

The rise of growth equity funds also helped push private market activity to new heights. Assets invested in growth equity funds, which invest in relatively mature private companies, have grown at a compound annual growth rate of 4.2 percent over the last five years, as firms traditionally focused on venture capital and private equity move into the space. Blackstone, for example, closed its inaugural $4.5 billion growth equity fund in March 2021. In the past ten years, six of the ten largest buyout managers have launched a growth investment vehicle, according to the report.


According to McKinsey, firms traditionally focused on venture capital accounted for 16 percent of growth equity fundraising last year, while buyout firms accounted for 12 percent.

One reason why private market investors are moving toward earlier-stage investments is to avoid near-term public debuts amid heightened volatility. In China, the regulatory crackdowns have driven late-stage money to growth and early-stage firms, according to Tiffany Hsiao, managing director at the investment manager Artisan Partners. “Investors know that if they invest at late stage, they will have to face IPO soon,” she said. “The market was just not ready for lots of IPOs.”

With companies staying private longer than ever, there’s an also expanding universe of investable growth-stage companies. Growth “stands out as a natural next frontier” as traditional buyout managers look to increase their product offerings, according to McKinsey.

Besides devising new products, the most successful fundraisers have also been “growing their flagships and raising more frequently,” McKinsey said. The amount of capital accumulated by the top 20 fundraisers increased from $160 billion in 2016 to $550 billion in 2021. They have also raised funds “almost twice as quickly” over the past five years, the report said.

The fundraising success of the largest firms does not imply less competition among private market asset managers, according to Portner. In fact, the “there are so many new firms being introduced to the market [that] there actually hasn’t been greater consolidation over time,” he said. Brian Vickery, a partner at McKinsey and a co-author of the report, added that “consolidation just did not show up in the data” even after the research team specifically tried to tease it out.

In terms of the outlook for 2022, the authors questioned the sustainability of such an unprecedented level of private market activity. “A new set of risks emerged at the beginning of 2022 with the potential to undermine growth and performance,” the report said. “The Russian government’s invasion of Ukraine, higher inflation and interest rates, and supply chain and labor challenges are already increasing volatility three months into the new year.”