Earlier this spring, McKinsey’s Global Private Markets Review—our flagship report examining private-markets data from the previous year—told a tale of two halves. There was a robust first half of the year, and a second half during which it often felt like the sky was falling. As the Federal Reserve started increasing interest rates to fight inflation, debt became both more expensive and more difficult to obtain. This development, combined with the decline in public markets, put downward pressure on deal volume, fundraising, and valuations in the private markets.

Many of these trends persisted through the first half of 2023 and may continue to shape the market going forward. That’s why a retrospective report like ours can be instructive for managers and investors making strategic decisions. The report is intended to help private-market players evaluate the trends that shape private markets and make more informed strategic, operational, and portfolio-related decisions.

Our review revealed several notable highlights, along with some surprises. Private-markets fundraising declined 11 percent from 2021, falling to $1.2 trillion. Many institutional investors were affected by the denominator effect, whereby falling public-market allocations increased the relative weight of their private-market holdings. Dealmaking also declined as financing alternatives became less attractive and valuations less certain, with 2022 private equity volumes down 26 percent from the prior year.

Surprisingly, however, 2022 was still the second-best year ever for both fundraising and deal volume, according to our analysis. Why was activity so strong, especially in what felt like such a challenging year? The simplest explanation is that “tale of two halves.” While the market slowed dramatically in the second half of 2022—which was one of the slowest dealmaking environments of the past several years—the frenetic pace in the first half of the year had already ensured robust full-year tallies.

Highlights among asset classes and strategies include private debt and infrastructure fundraising, which gained 2.1 percent and 6.5 percent, respectively, even as private markets’ two largest asset classes—private equity and real estate—saw year-over-year double-digit fundraising declines. The relative success of these two strategies amid market turmoil is partly the result of their stability: of the private-asset classes, debt and infrastructure tend to have the lowest performance volatility and greatest degree of inherent downside protection. The pace of inquiries we have had from companies interested in launching or expanding into these asset classes has picked up noticeably in the past six to 12 months.

Sustainable investing thrived in 2022, buoyed by the energy transition and new government policies, including the US Inflation Reduction Act. Fundraising that focused on environmental, social, and governance initiatives totaled $24 billion in the first half of the year, already almost as much as the previous full-year record of $28 billion. And sustainability-related investments increased by 7 percent to nearly $200 billion, a new record, proving resilient to the dealmaking headwinds affecting private markets overall.

In the first half of 2023, we saw a different market sentiment emerge as private-market players adapted to the realities of the new environment that took hold in the past year. Managers are establishing new financing relationships and updating value creation assumptions to account for the reality that debt is more than 50 percent more expensive than it was a year ago. Sellers and buyers are gradually adjusting expectations on asset prices (though this process is far from complete). And general partners are adjusting fundraising expectations and approaches to account for the fact that limited partners plan to commit less capital to private markets this year.

ABOUT THE AUTHOR

John Spivey is an associate partner in McKinsey’s Charlotte office.

MORE FROM THIS AUTHOR

UP NEXT

Employees of all ages value many of the same benefits of their organizations’ workplaces, but a one-size-fits-all approach isn’t the answer. Meaningful investments and a nuanced approach to the work experience can help companies keep people engaged.