Global sentiment about the economy seems more positive so far in 2024 than seen in 2023. However, several pressing concerns—geopolitical instability, elections in more than 60 countries, monetary-policy uncertainty around the world, and recent market volatility in Japan, to name a few—remain. These challenges are impeding recovery in private markets, at least for the near term.
In January, McKinsey published a list of ten considerations for private-market players for 2024.1 As companies enter the fourth quarter of the year, many of these considerations continue to shape the next era of private markets. However, new challenges and opportunities are emerging, particularly in the United States, along with increasing pressure on GPs to transact and return capital to their investors.
Recovery in dealmaking is materializing
If private-market players entered 2024 hoping for a robust market recovery, the first half of the year likely left them wanting more. The 12-month moving average for private equity (PE) deal count remained constant between January and August 2024, while total deal value rebounded by around 20 percent since the lows of early 2024. Yet despite increased volume, transaction levels remain well below 2021 and 2022 levels.
Lack of deals and, more specifically, lack of exits have elongated holding periods, which are more than a year longer for median holding periods in North American PE than they were in 2021.2 The lack has continued to challenge new fundraising efforts, as LPs wait for return on capital from years-old investments before deploying anew.
PE fundraising leads as other asset classes remain at a standstill
In the first half of 2024, PE companies raised $366 billion—10 percent more than the capital raised in the first half of 2023.3 Still, the total remains over 20 percent below the record sum raised in the first half of 2021 (a lofty peak year for fundraising), as the denominator effect and lack of exits continue to weigh on new commitments. Infrastructure funds raised $51 billion during the first half of 2024, more than doubling the total from the comparable period in 2023.4 During 2023, fundraising fell sharply, in part because of supply. Few scaled infrastructure managers held final closes in 2023.
Meanwhile, fundraising has slumped in private debt, despite strong indications of long-term LP interest. It has also decreased in real estate, in which higher capitalization rates and lower rent growth have tempered investor interest in the short term.
Concentration among large and well-known companies continues
The trend over the past several years of LPs favoring large and well-established managers has persisted in 2024 so far. In the first half of the year, the top ten PE funds accounted for over 35 percent of aggregate capital raised—more than ten percentage points higher than the average of the past five years.5 Whether near-term concentration foretells consolidation in what is still a highly fragmented market remains to be seen. A similar concentration trend occurred during challenging fundraising environments in the past (for example, in 2008 and 2013).
GPs are focusing on value creation to meet return targets
In today’s environment of increased interest rates, elevated inflation, and lowered multiples, value creation has shifted from being a strategic option to being an absolute requirement. Bluntly speaking, substantially more cash flow growth is now required for a given investment to reach most investors’ return thresholds. To meet this higher bar, GPs may often need to go beyond traditional value creation levers (for example, SG&A cuts and pricing) to incorporate bold M&A pathways, harvest nonstrategic business units, build new businesses, improve working capital, and invest in digital capabilities.
Given the heightened importance of value creation, some GPs have also more closely tied inputs from their operating teams to their initial underwriting cases. Doing so successfully may give GPs an advantage in winning deals that require bold planning and strong underwriting conviction.
Private credit is expanding into new frontiers
High risk-adjusted returns and constrained bank lending have increased the capital deployed in private credit. As a percentage of buyout loan volume, direct lenders held 64 percent share in 2023 and roughly 57 percent share in the first half of 2024, both up from roughly 49 percent in 2022.6 Clearly, the strategy remains appealing to investors. But private credit’s traditional resilience is being put to the test amid rising global defaults and regulatory scrutiny.
While declining interest rates may ease pressures, 2024 looks like a year of evolution for the asset class. There are examples of managers expanding beyond the conventional definition of private credit and making forays into growing areas, such as asset-based lending (for example, aircraft loans and equipment leasing) and more specialized finance pools (such as credit cards and nonconforming residential mortgages). Additional competition in private credit is expected from asset managers, banks, and insurers.
Talent challenges, notably for portfolio companies, are evolving
Lowered valuations and a slow pace of exits may reduce carried interest, making it harder for GPs to attract and retain top talent. Additionally, decreased fundraising activity across PE, infrastructure, and real estate sectors has limited the opportunities for new hires to join these funds.
On the portfolio company side, different factors drive the challenges. Amid a tight job market—unemployment has stayed below one person per job opening since May 20217—portfolio companies are struggling with talent shortages, particularly in financial roles, from accountants to CFOs.
Lowered interest rates and spreads may be affecting deal flows
The central banks of several major economies have announced rate cuts this year. Spreads have also narrowed, with the US high yield at around 3.4 percent.8 Should rates continue to fall, private-market valuations may be positively affected, which in turn could have positive effects on deal flow. Lower spreads might have a similar effect: if PE managers finance deals at lower costs, the volume of transactions would potentially increase.
Infrastructure fundraising turns a corner
After a challenging 2023, infrastructure fundraising gained traction in the first half of 2024, with closed-end funds raising more capital than they did in the same period of 2023.9 The recovery was driven by growing funding needs for digital and energy infrastructure assets and, to some extent, by supply (more funds came to market). Despite these tailwinds, fundraising in the first half of 2024 remained roughly 50 percent below 2022 levels.10
In 2024 so far, value creation in infrastructure portfolios continues to increase in importance amid elevated interest rates and competition for assets. Successful investors are developing value creation plans as part of their due diligence and agenda for the first 100 days. The convergence of digital infrastructure and energy has continued with the rapid build-out of data centers and the significant power demand that they create. Infrastructure investors are also expanding into new areas, such as service businesses that have cash flow visibility, high barriers to entry, criticality to society, and other infrastructure-like characteristics.
US commercial real estate faces continued challenges
The US commercial-real-estate sector continues to grapple with considerable challenges driven by a combination of expanded capitalization rates and high financing costs. An impending debt wall, with nearly $1.8 trillion in commercial property debt maturing over the next two years, is possible.11 This could potentially accelerate deal volume or trigger a distress cycle, especially if rental growth remains stagnant and capitalization rates do not compress.
Offices, particularly older ones, have experienced the most substantial decline in deal volumes and now stand at about half their five- and ten-year medians.12 Uncertainty around office demand and valuations persists, largely because of the ongoing shift toward hybrid work. In contrast, apartment real estate saw an uptick in deal volumes in the first half of 2024, signaling a possible return to long-term-growth trends.
Meanwhile, industrial real estate presents a more mixed picture, with global deal volumes in the first half of 2024 down compared with 2023, though capitalization rates remain roughly 2.5 percentage points below 2008 levels (versus 1.4 for retail and 0.8 for offices), suggesting potentially lower risks. Finally, retail real estate in 2024 so far is more aligned with the stable-to-downward trend seen prior to the COVID-19 pandemic.
Secondaries market sustains its growth trajectory
With limited IPO and traditional deal activity, managers are increasingly turning to the secondaries market to monetize investments that are nearing the end of their hold periods. This suggests that the supply of GP-led transactions may continue to remain robust. And the denominator effect, should it continue, is likely to influence more LPs to consider selling stakes, providing a potential tailwind in the traditional LP stake market.
Overall, 2024 has been a strong year for this strategy, with the closing of the largest real-estate-secondaries vehicle on record and transaction activity reaching new highs.13 Secondaries capital represents only about 1 percent of unrealized value in private-capital markets, however.14 So there is ample headroom for further capital deployment.
As private-market participants confront new and familiar challenges, the industry’s path to recovery will likely be uneven. Certain asset classes and subsegments have already turned a corner in fundraising and deal activity, while others remain at a standstill. Now more than ever, decision makers should focus on real value creation driven by top-line growth, cost optimization, and balance sheet management.
