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June 2024
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PE Panorama: McKinsey plays sweet music for private markets

McKinsey
By Paul Mackintosh   
April 11, 2023

Hot on the heels of the recent Asia Pacific private equity report from Bain & Company comes McKinsey’s global private markets review. According to this report, private markets “turn down the volume”.

Nevertheless, the consulting firm still plays sweet music for the industry to hear. It notes that private markets have enjoyed strong tailwinds since the depths of the global financial crisis. “Interest rates stayed low, credit availability was high, and valuations rose consistently. Each year since its inception, this annual publication has discussed new records.”

Must be on the level, surely. After all, it’s McKinsey, whose intellectual authority and objectivity must be beyond question. Who would never ever be in hock to their clients.

That’s assuming, of course, that the industry performance figures can be trusted. Because here we have, at end-March 2023, a PitchBook report that asks whether private equity valuations are too high, and indeed, would we even know?

Hold on. PitchBook is one of the most authoritative and trusted private markets data providers out there. And they are saying, in 2023, after multiple decades of private equity industry growth, that we still don’t know how much the assets held by private equity funds are really worth?

The report cites a net asset value increase of almost 85% from the first quarter of 2020 to September 2022 for private equity, versus an 18.8% aggregate performance from public markets for the same period – an advantage of more than 66%. That’s quite a performance…or something.

It’s interesting how the narrative is being spun in different areas and for different audiences. As the banking crises unfold and the economy groans under inflationary pressures, the post-financial crisis cheap money era is increasingly being written up as a period of reckless imprudence, misapplied stimulus, absurd valuations and irresponsible governance.

Unless you're talking about private equity. There we’re still treated to a comforting tale of vibrant growth based purely on merit and on the innate superiority of private markets. Externalities like the desperation and gullibility of underfunded US public pension funds and the availability of bargain basement debt are completely ignored.

It seems like this story is taking as long to catch up to reality as private equity funds’ “smoothed” returns do to public markets. Let’s try this one instead. Private equity was a privileged beneficiary of, and conduit for, an unprecedented era of cheap debt, which was responsible for its current supersizing and its performance figures far beyond actual value improvement. Now that era is over, it's time for a shakeup and a shakeout in the industry like we're seeing in the banking sector.

Any private equity professional with true respect for the discipline of real business value enhancement will surely agree. After all, we need banks far more than we do private equity funds.