“K-Shaped Recovery”: Private Markets Outlook Shows Glass Half-Full Beyond the Pandemic
Despite the intense volatility brought on by the COVID-19 pandemic, global private markets assets grew 5 percent in 2020, bringing total global private markets assets to an all-time high of more than $7 trillion, according to McKinsey Global Private Markets’ report “A year of disruption in private markets.”.
According to the report, “following a second-quarter ‘COVID correction’ comparable to that seen in public markets, private markets have since experienced their own version of a K-shaped recovery: a vigorous rebound in private equity contrasting with malaise in real estate; a tailwind for private credit but a headwind for natural resources and infrastructure.”
Increasing flows to the private market has continued in 2021 and shows no signs of reversal. In fact, we see quite the opposite. To get a deeper understanding on what has been driving increased capital flows into the private market, Goldman Sachs recently reviewed more than 100 hedge fund managers with private markets exposure in 2Q.
Here are some interesting key findings from the research, as reported by Forbes:
- Companies are conducting more equity funding rounds before an IPO: In 2006, the median number of funding rounds was one, and in 2021, this number has grown to three.
- Companies are raising more money in the private markets as well, with the average climbing from $43 million in 2006 to $222 million in 2021. The median has increased from $30 million to $58 million.
- Additionally, the volume of highly-valued unicorns, private companies valued at more than $1 billion, has risen dramatically. In 2006, there were only three unicorns, but today, there are 392 active unicorns. In the first half of this year alone, 155 companies achieved unicorn status for the first time.
- There is another factor driving increased capital flows in the private market: Capital market conditions have been extremely supportive. U.S. equity and equity-linked issuances like traditional IPOs, special purpose acquisition companies (SPACs), follow-ons and converts reached a record high of $468 billion last year. Year to date, issuances have reached $337 billion, marking the largest first half ever recorded.
This shift has pre-pandemic roots as well. According to the report: for the 10 years ending in 2020, PE and VC strategies have enjoyed an annualized return of 14.2%, marking a 3.7% premium over equities.
A New Virtual Playing Field for Private Markets
And according to McKinsey’s report, “the pandemic’s most durable impact on private markets may be in how it has changed the way business is done.” The report looked at how the overnight shift to a remote work environment impacted deals getting done.
Despite initial hiccups, GPs and LPs bounced back and used digital solutions to overcome challenges brought on by the new normal environment. In many ways, this has created a new playing field with more opportunities than before – ie the glass remains half full.
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