Institutional investors are continuing to increase their allocation to private markets as new sources of capital enter the market, according to a McKinsey & Co. report.

The consultancy firm said the outlook for growth in private market assets from both traditional and new sources of capital remained strong in 2020. It found that allocations among limited partners – which includes sovereign wealth funds, public and private pension funds and insurers – all fell short of target levels and retailer investors were becoming an increasing source of new capital.

“The fundraising outlook remains favourable,” McKinsey wrote in the report. “The early prognosis for 2020 is for continued strength: by the end of 2019, large firms had announced targets collectively approaching $350 billion, more than at year-end 2018.”

Last year, private market assets under management grew 10 per cent to a new record at $6.5 trillion as investors continued to shift capital from the public markets in search of higher returns. Private equity  (PE) led the increase, climbing 12.2 per cent to $2.9 trillion.

McKinsey found that for PE alone, institutional investors were under-allocated versus target levels by more than $500 billion. That’s as much as the global amount raised for PE in 2019.

More to come

“All the evidence suggests that despite the record amount of capital committed to PE over the last several years, there’s likely more to come,” it said in the report.

It also found that new sources of capital were finding the way into private markets including private equity as managers ramp up fund raising from alternative sources of capital including from individual investors.

“Through feeder vehicles into classic buyout funds, as well as newer products designed for sale via financial advisers, the largest players in the industry are finding ways to raise capital from the retail and high-net-worth markets,” the report found. “Retail investors are beginning to represent a meaningful source of capital for private market managers.”

Despite the record levels of fundraising, deal volume in private markets declined in every region last year with the exception of North America, where the amount of capital invested rose 7 per cent to a new high of $837 billion. This was led by technology deals, which were up by almost 40 per cent.

Buyout multiples in the US continued to climb in 2019 to reach nearly 12 times, while leverage surpassed levels last seen in 2007. Dry power, that is capital that has been committed but not yet invested, stands at a record $2.3 trillion. Private equity makes up the majority of the total.

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