Over the past decade, fiscal stimulus and opportunities for liquidity have caused a surge within the private capital markets. Even though this year’s outlook is challenged by increasing borrowing costs and economies cooling, London-based research firm Preqin forecasts that the industry’s global assets under management will double to $18.3 trillion by the end of 2027, from $9.3 trillion currently. The study highlights how investors desire to seek alternative investment types in an economic environment characterized by uncertainties. While the first half of 2022 did see a fundraising drop in private capital by $337 billion from $495 billion in the same period last year. However, by 2023, private capital fundraising is expected to return to 2019 levels as the growing trend of private capital continues.
Private equity fundraising hit a record $561 billion in 2021, with North America leading the way, followed by Asia-Pacific and Europe, according to Preqin. According to McKinsey North America had about a 22% growth in private capital markets, compared to Europe with 17% and Asia with 13%. This means that for investors and companies raising capital, the US is a more attractive market than Europe and Asia and is a great place to market your private capital offering, notably through JOBS Act regulations like Reg A+ and Reg CF.
Private markets have been able to continue to grow during this pandemic because of the growth in digitalization and the internet. This has allowed for a decrease in face-to-face interactions, which has made it easier for managers to connect with LPs, as well as an increase in online tools and resources. For example, many fund managers have started using online data rooms, which allow investors to access documents and due diligence materials remotely. In addition, online investor portals have become more popular, providing LPs with 24/7 access to information on their portfolios.
The study found that the average private equity fund size has increased over the past decade, while the number of first-time funds has declined. The report attributes this to the “maturing” of the industry and the rise of large institutional investors, which have become an increasingly important source of private capital. Institutional investors, such as pension funds, insurance companies, and endowments, are allocating more of their portfolios to private capital as they seek higher returns. Private markets have outperformed traditional public markets in recent years, but that outperformance is expected to moderate over the next decade. Preqin’s study predicts that private equity returns will net 7.6 percent annually between 2018 and 2027, compared to 6.4 percent for public markets.
According to Preqin, the interest in impact investing has also increased in recent years. The firm estimates that there are now more than 3,000 impact funds globally, with assets under management totaling $228 billion. In particular, environmental, social, and governance (ESG) considerations are becoming increasingly important to private capital investors. A majority of private capital firms say that they consider ESG factors when making investment decisions, and almost half of firms say that they have adopted policies or strategies specifically focused on impact investing. As the private capital markets continue to grow, firms need to consider how they can best position themselves to capitalize on this growth.
The private capital markets are expected to continue growing in the coming years, presenting a unique opportunity for raising capital. In addition, the growth of the private capital markets may lead to more regulation, as policymakers seek to mitigate risk and protect investors. Overall, the study provides a positive outlook for the private capital markets. For firms looking to take advantage of this growth, it’s vital to consider how they can best position themselves to capitalize on these opportunities. For investors, this means considering which private capital investment opportunities offer the best potential returns. But regardless of how the private capital markets evolve, one thing is clear: they are likely to play an increasingly important role in the global economy.