Private markets have faced a dynamic landscape in 2024, shaped by both challenges and new opportunities. The year has seen a mix of geopolitical uncertainties, monetary policy shifts and market volatility, particularly in Japan, which have all impacted private markets. As companies enter the year’s final quarter, the trends identified early in 2024 continue to influence the trajectory of private markets, particularly in the US. According to management consultancy firm McKinsey & Company, key considerations include the recovery in dealmaking, shifts in fundraising, the role of private credit and emerging challenges related to talent and asset management.
Recovery in dealmaking
The start of 2024 saw private market participants hoping for a strong recovery in deal-making. However, the rebound has been more moderate than expected. Between January and August, the 12-month moving average for private equity (PE) deal count remained flat, while deal value increased by approximately 20%. Despite the growth in transaction volumes, they remain well below the peak levels of 2021 and 2022. This slower-than-anticipated recovery is driven by the ongoing scarcity of deals, particularly exits, which has extended the median holding periods in North American private equity by more than a year compared to 2021.
The longer holding periods have created difficulties for new fundraising efforts. Limited partners (LPs) are reluctant to commit new capital until they see returns on previous investments, which have been delayed due to the lack of exits. This challenge is felt across private markets, affecting deal flow and the pace of new investments.
Fundraising trends across asset classes
In the first half of 2024, private equity companies raised $366 billion, a 10% increase over the same period in 2023. However, this figure remains 20% lower than the record highs of 2021. The ongoing “denominator effect” and the extended timeline for capital returns from existing investments have continued to weigh on new fundraising efforts. Infrastructure funds, on the other hand, saw significant growth, raising $51 billion in the first half of the year, more than double the amount raised during the same period in 2023. The need for infrastructure investment, particularly in digital and energy sectors, has driven this recovery.
Private debt, though traditionally resilient, has faced challenges in 2024. Fundraising in this asset class has declined despite strong interest from long-term investors. Real estate fundraising has also slowed, primarily due to higher capitalisation rates and reduced rent growth, which have tempered investor enthusiasm.
Continued concentration in fundraising
A notable trend in 2024 is the continued concentration of capital among large, well-established private equity firms. The top ten private equity funds accounted for more than 35% of total capital raised in the first half of the year, a 10-percentage-point increase compared to the average of the past five years. This concentration has raised questions about whether the trend signals consolidation in an otherwise fragmented market. A similar trend was observed in previous periods of fundraising difficulty, such as in 2008 and 2013.
Focus on value creation
In the current elevated interest rates and inflation environment, value creation has become necessary for private equity firms looking to meet return expectations. The days when firms could rely on simple strategies like cutting selling, general and administrative (SG&A) expenses or modest pricing adjustments to create value are largely over. Instead, PE firms must now focus on more aggressive value-creation strategies, such as mergers and acquisitions (M&A), divesting non-core business units, improving working capital and investing in digital capabilities.
Private equity firms are also tying operating team inputs more closely to their initial investment underwriting processes, which can provide a competitive advantage in securing deals that require bold planning and strong execution capabilities.
Expansion of private credit
Private credit has expanded into new areas in 2024, driven by constrained bank lending and the appeal of high-risk-adjusted returns. Private credit’s share of buyout loan volume grew from 49% in 2022 to 64% in 2023, with a modest decline to 57% in the first half of 2024. This increase demonstrates the asset class’s growing importance, although rising global defaults and regulatory scrutiny are putting private credit’s traditional resilience to the test.
Some private credit managers have expanded beyond traditional lending to explore new opportunities, such as asset-based lending (e.g., aircraft loans and equipment leasing) and non-conforming residential mortgages. Despite these expansions, competition in the space has intensified, with asset managers, banks and insurers increasingly entering the private credit market.
Talent shortages and challenges
Attracting and retaining talent has become a growing challenge for PE firms and their portfolio companies in 2024. The combination of lower valuations, reduced exits, and decreased fundraising has made it harder for firms to offer carried interest packages that are attractive enough to compete for top talent. On the portfolio company side, talent shortages, particularly in financial roles, have persisted as unemployment rates have remained low, with fewer candidates available for accounting and CFO positions.
Impact of lower interest rates and spreads on deal flow
As central banks in major economies have cut interest rates in 2024, there are signs that lower spreads may help spur deal flow. The US high yield spread has fallen to around 3.4%, and lower financing costs could encourage private equity firms to pursue more transactions. This dynamic could result in increased deal flow, especially if rates continue to fall, reducing borrowing costs for private market participants.
Infrastructure fundraising and value creation
Infrastructure fundraising has recovered in 2024, with more capital raised in the first half of the year compared to 2023. This growth has been driven by demand for digital and energy infrastructure, as well as increased supply as more funds have come to market. However, fundraising levels are still roughly 50% lower than in 2022, reflecting the ongoing challenges in the space.
Successful infrastructure investors in 2024 are prioritising value creation, incorporating detailed plans into their initial due diligence and the first 100 days after acquisition. The growing convergence of digital infrastructure and energy is driving demand for data centres, which require a significant power supply, further boosting infrastructure investment opportunities.
Challenges in US commercial real estate
The US commercial real estate sector has faced significant difficulties in 2024, particularly due to increased capitalisation rates and high financing costs. An impending “debt wall,” with $1.8 trillion in commercial property debt set to mature over the next two years, could lead to distress in the market. Office properties, especially older ones, have seen the most substantial declines in deal volume, while apartment real estate has shown signs of recovery, with deal volumes increasing in the first half of the year.
Secondaries market growth
With traditional exit opportunities like IPOs and strategic acquisitions remaining limited, private equity managers are increasingly turning to the secondaries market to monetise investments. GP-led transactions have remained robust in 2024, and the secondaries market has seen record activity, with the largest real estate secondaries vehicle closing in the first half of the year. Although secondaries capital represents only about 1% of unrealised value in private capital markets, there is significant potential for further growth in this area.
2024 has proven to be a year of both challenges and opportunities for private markets. While certain asset classes, such as infrastructure and private equity, have seen recovery in dealmaking and fundraising, others, like real estate and private debt, continue to face headwinds. As market participants navigate these shifts, focusing on value creation, top-line growth, and cost optimisation will be crucial for delivering returns.
