Mumbai: Private equity (PE) investments touched a new high of $1.4 trillion globally in 2018, surpassing the previous peak recorded before the financial crisis in 2007, according to a report by consulting firm McKinsey & Co.
The investments were driven by 19 deals of more than $5 billion each in healthcare, financial services, real estate, information technology, and food and beverage industries. This compares with 15 such ‘megadeals’ in 2017 and nine in 2016.
While private market deal activity stayed strong, fundraising fell by 11% with fund managers raising $778 billion in 2018 and the third largest year in terms of fundraising after 2017 and 2016, the report said.
In spite of the slowdown in fundraising in 2018, 2019 is expected to be a much stronger year, with announcements exceeding $300 billion, roughly double the amount at the same point last year.
“More investors believe that private markets have become effectively required for diversified participation in global growth," the report said.
Venture capital (VC) was an outlier in 2018’s private equity fundraising, increasing 13%. Over the past five years, VC fundraising has grown at an average 18% per year, versus just 4% for private equity buyouts. With this surge, venture’s share of total PE fundraising increased from 15% in 2017 to 20% in 2018, the second-highest since 2012.
One of the drivers for these inflows to VC funds has been the potential of outsized returns. As measured by pooled returns, VC outperformed buyouts in every vintage from 2005 to 2015, although pooled returns are disproportionately affected by a few stellar deals.
“Investors able to secure access to top VC firms find the asset class highly attractive, while those with limited access or middling manager selection capabilities often find it less rewarding," the report said.
Fundraising is increasingly being dominated by megafunds, with such funds absorbing an ever-greater share of funds raised, the report said. Thirty-two funds of $5 to $10 billion were raised between 2007 and 2012, and 75 in the six years since. In 2018, 19 funds of this size were raised.