Rise of Private Markets 2018

McKinsey Global Private Markets Review 2018
The rise and rise of
private markets

1
Contents
Introduction 2
Going strong 4
Capital inflows in 2017
Now comes the hard part 16
Capital deployment, including dealmaking and dry powder
The march of progress 23
Discipline comes to private markets

2 The rise and rise of private markets McKinsey Global Private Markets Review 2018
that scale has not imposed a performance penalty;
indeed, the largest funds have on average delivered
the highest returns over the past decade, accord-
ing to Cambridge Associates. What was interesting
in 2017, however, was how an already-powerful
trendaccelerated,withraisesforallbuyoutmegafunds
up over 90 percent year on year. For comparison,
fundraising in middle-market buyouts (for funds of
$500 million to $1 billion) grew by 7 percent, a
healthy rate after years of solid growth.
Investors’ motives for allocating to private markets
remain the same, more or less: the potential for
alpha, and for consistency at scale. Pension funds,
still the largest group of limited partners (LPs),
are pinched for returns. Endowments are already
heavily allocated to private markets and do not
appear keen to switch out. Meanwhile, sovereign
wealth funds (SWFs) are looking to increase
The year just past was, once again, strong for private
markets.1 Even as public markets rose worldwide—
the S&P 500 shot up by about 20 percent, as did other
major indices—investors continued to show interest
and confidence in private markets. Private asset
managers raised a record sum of nearly $750 billion
globally, extending a cycle that began eight years ago.
Within this tide of capital, one trend stands out: the
surge of megafunds (of more than $5 billion),
especially in the United States, and particularly in
buyouts. Remarkably, the industry’s record-setting
2017 growth is attributable to a single sub-asset
class in one region. Notably too, if mega-fundraising
had remained at 2016’s already lofty level, total
private market fundraising would have been down
last year by 4 percent. Of course, this trend to
ever-larger funds isn’t new. Megafunds have become
more common, in part as investors have realized
Introduction

3Introduction
their exposure to private markets, increasingly
using co-investments and direct investing to boost
their ability to deploy capital. Fully 90 percent of
LPs said recently that private equity (PE), the largest
private asset class, will continue to outperform
public markets—despite academic research that
suggests such outperformance has declined
on average.
And so, capital keeps flowing in. Our research indi-
cates that, in the past couple years, the industry’s
largest firms have begun to collect a growing share of
capital, perhaps starting to consolidate a fragmented
industry. Yet private asset managers did not have
it all their way in 2017. The industry faced some mild
headwinds investing its capital. Although the deal
volume of $1.3 trillion was comparable to 2016’s activ-
ity, deal count dropped for the second year in a
row, this time by 8 percent. In two related effects, the
average deal size grew—from $126 million in 2016
to $157 million in 2017, a 25 percent increase—and
managers accrued yet more dry powder, now
estimated at a record $1.8 trillion. Private markets’
assets under management (AUM), which include
committed capital, dry powder, and asset apprecia-
tion, surpassed $5 trillion in 2017, up 8 percent
year on year.
Why did managers hesitate to pull the trigger, or
struggle to find triggers to pull? One explanation is
the price of acquisitions. Median PE EBITDA
multiples in 2017 exceeded 10 times, a decade high
and up from 9.2 times in 2016. With price tags
nowincreasinglyprintedongoldfoil,generalpartners
(GPs) had to be smarter with their investment
decisions and more strategic with their choices.
The byword of 2017 was scale. The way that LPs and
GPs respond to the challenges and opportunities
of scale will be critical to their success. LPs and GPs
of all sizes will need to hard-code discipline into
every part of their business system. Before long, GPs
may find themselves having to choose between
two models: managers capable of deploying capital at
scale, and specialists operating at a smaller scale.
For the first group, capital will continue to pour in,
but what counts as an attractive deal may shift
given that asset classes like PE are not infinitely
scalable—at least not with historical levels
of performance. For the second group, a strategic
decision is at hand: get bigger, or stay the
course. Both options can be successful, if firms
clearly identify how they are differentiated
and execute their strategies with the neces-
sary rigor.
About this report
This is the 2018 edition of McKinsey’s annual
review of private markets. To produce it, we have
developed new analyses drawn from our long-
running research on private markets, based on the
industry’s leading sources of data.2 We have also
conducted interviews with executives at some of the
world’s largest and most influential GPs and
LPs. Finally, we have gathered insights from our
colleagues around the world who work closely
with asset owners and managers.
This report begins with a review of the industry’s
capital flows in 2017, including fundraising,
AUM, and the deployment of capital. We then review
the implications of these dynamics for the all-
important relationship between LPs and GPs, and
conclude with some ideas about how LPs and
GPs can find continued success in this remark-
able age.

LPs’ motivations for allocating to private markets
remain strong, and so fundraising continues to rise
rapidly, particularly in private equity, private debt,
and, despite some reports, real estate. It’s no surprise
then that AUM also set a new high-water mark. All
this is heady stuff. But perhaps the most interesting
finding in our research on capital flows is that,
at last, little by little, the industry may be starting
to consolidate.
The widening divide
Defined-benefit pension funds in many parts of the
worldarefacingamassiveliabilitygap—thedifference
between their assets and what they owe. Consider
the situation in the United States (Exhibit 1). In the
years leading up to 2008, the average funding
ratio of US public pensions was just shy of 80 percent,
reflecting a gap of some $1.8 trillion. During
the global financial crisis, the gap then lurched
significantly wider (roughly doubling from $1.8
trillion to $3.5 trillion). Since then, it has remained
in the same absolute range, despite very strong
growthinassetprices—particularlyequities,inwhich
most US pension funds are well invested. The gap
expanded by 0.9 percent annually during 2008–17,
despite annual growth in the S&P 500 of 13.4 per-
cent over the same period, and today stands at $3.8
trillion. Many European pensions are similarly
underfunded. This liability gap remains a powerful
incentive for investors to seek the outsized returns
that private markets have historically provided.3
Many factors have propped open the liability gap.
First, though most pensions have sizable exposure to
equities, many recognized significant losses at
the time of the downturn and did not reallocate with
sufficient alacrity to take full advantage of the
past decade’s bull run. Second, US pensions have
Going strong

5Going strong
been gradually lowering the rate of return they
assume they will achieve on their investments, caus-
ing the present value of liabilities to rise. Third,
manypensionshavebeenbelatedlyrevisingmortality
tables that had been in place for 15 or 20 years. As
life expectancy increased by approximately two
years over the period 2000–17, liabilities increased
proportionately to longer expected retirements.
These changes in financial and actuarial estimates
have caused the reported liability gap to persist.
Seen another way, the actual liability gap had been
larger than reported, and the numbers have been
catching up with the reality.
Other LPs also have reasons to invest in private
markets. SWFs’ desire for persistent performance
has been increasing along with volatility in energy
markets over the past several years. SWFs have
been increasing their exposure to private markets,
often through direct investing or co-investments
alongside GPs. Endowments, on the other hand, are
already heavily allocated to private markets,
often earmarking nearly half their portfolio.
Endowments continue to drive a lot of mid-market
activity, often taking the approach that “small is
beautiful” and favoring long-term relationships with
managers whose strategies they believe in. That
Exhibit 1
McKinsey & Company 2018
PE annual report
Exhibit 1 of 20
The US pension gap has barely changed since 2008.
1 Based on Q3 2017 data.
Source: Federal Reserve Statistical Release, December 2017
US pensions assets and liabilities, 2005–17, $ trillion
2
1
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20171
4
6
8
10
12
3
5
7
9
11
13
Liabilities
Assets
3.8
1.8
3.5

Exhibit 2
PE annual report
Exhibit 2 of 20
Private market fundraising grew by 3.9%.
1 Closed-end funds that invest in property. Includes core, core-plus, distressed, opportunistic, and value-added real estate as well
as real-estate debt funds. Note that real estate as an overall asset class grew when accounting for growth in open-ended funds as
well as separately managed accounts.
Source: Preqin
North
America
Total, $ billion
2016–17, $ billion
YoY change, %
233
+36.6
18.6
70
–8.4
–10.7
67
–1.2
–1.8
45
–12.4
–21.8
33
+0.2
0.7
448
+14.9
3.4
Europe Total, $ billion
2016–17, $ billion
YoY change, %
95
+2.0
2.1
30
–0.8
–2.7
33
+6.9
26.2
16
+9.0
127.5
22
+1.9
9.6
196
+19.0
10.7
Asia Total, $ billion
2016–17, $ billion
YoY change, %
60
+5.3
9.6
9
–2.3
–20.0
6
+3.9
192.0
1
+0.4
50.7
2
–9.4
–86.1
78
–2.2
–2.8
Rest of
world
Total, $ billion
2016–17, $ billion
YoY change, %
9
–4.7
–35.5
3
–3.5
–56.7
1
+0.4
55.1
6
–0.2
–3.6
7
+4.6
239.9
26
–3.4
–12.2
Global Total, $ billion
2016–17, $ billion
YoY change, %
397
+39.2
11.0
112
–15.1
–11.9
107
+10
10.2
68
–3.3
–4.6
64
–2.6
–4.0
748
+28.2
3.9
Private
equity
Closed-end
real estate1
Private debt
Natural
resources
Private
marketsInfrastructure
said, their commitments have been changing less
than those of pensions and SWFs.
All told, LPs remain under substantial pressure
to find returns, and it is private markets to
which they have continued to turn, based on a
history of outperformance. In a recent survey,
91 percent of LPs say that the various private asset
classes will deliver returns above public
markets. Their belief is echoed by many invest-
ment consultants who continue to predict
such outperformance. This faith has been tested
in recent years by several academics who have
found that PE outperformance at the median level
has declined.4
The debate about performance continues, however,
in no small part because industry-level data
remain incomplete at best. The quality of publicly
available data may indeed be degrading over
time, as assets continue to migrate from commingled
pools that are often publicly reported to separately
managedaccounts(SMAs),whichtendtooperatewith
greater opacity. In any event, the potential if not

7
Exhibit 3
PE annual report
Exhibit 3 of 20
US mega buyouts were a record 15 percent of all private markets
fundraising in 2017.
1 Private markets refers to private equity, real estate private equity (i.e., closed-end funds), private debt closed-end, natural
resources closed-end funds, and infrastructure closed-end funds. Secondaries and fund of funds are excluded to avoid double counting
of capital fundraised.
2 Buyout funds based in the US that closed above $5 billion.
3 Includes venture, growth, other private equity (balanced, hybrid, private investment in public equity).
4 Includes closed-end real estate, private debt, natural resources, infrastructure.
Source: Preqin; McKinsey analysis
Global private markets fundraising, 2003–17,1
$ billion 2012–17
CAGR, %
2016–17
CAGR, %
150
0
300
450
600
750
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Other asset classes4
78.3
14.2
–0.5
114.2
9.4
–28.1
Other private equity3
US megafund buyouts2
15%
24%
61%
the promise of considerable outperformance remains
alive and well for LPs that pick their managers well.
Fundraising: Peak to peak
As Exhibit 2 shows, fundraising was positive for
most asset classes and regions, with a few noteworthy
exceptions. Private equity and debt enjoyed large
increases (11 percent and 10 percent, respectively),
while other (typically smaller) asset classes fell:
natural resources by 5 percent, and infrastructure
by 4 percent. It was the second year of double-
digit growth for PE, after a 19 percent uptick in 2015–
16. RE also grew, though as we discuss below,
looking only at closed-end funds, for which data
is most widely available,5 provides an incomplete and
misleading view of RE. A quick review by asset
class will reveal some of the subtler dynamics within
this broad-brush picture, including a substantial
jump in private debt.
Private equity: Two roads diverged
It was a record year for fundraising, but growth was
overwhelmingly concentrated in just one region,
sub-asset class, and fund size: US buyout megafunds
(Exhibit 3). Indeed, if growth in these funds had
been flat versus 2016, overall fundraising would have
fallen by 4 percent. Megafunds now account for
15 percent of total fund raising, up from 7 percent
Going strong

in 2016, having exceeded their previous peak of
14 percent in 2007.
Solid growth was also seen in the middle market.
Buyout funds of between $500 million and $1 billion
raised $31.8 billion globally in 2017, a 7 percent
increase from 2016; funds of less than $500 million
raised $29.1 billion, a 3.5 percent increase from the
previous year. Middle-market fundraising was
strong but was overshadowed by global megafund
buyouts, which jumped 93 percent over the same
period from $90.1 billion to $173.7 billion.
What’s behind the growth in $5 billion-plus funds?
The prevailing wisdom has long been that the
“law of large numbers” might put a cap on megafund
returns: the thinking runs in part that the
companies on which such funds focus tend to
be larger, better run, and more efficient than smaller
buyout targets, thus offering fewer opportunities
for operational or financial improvements. On the
other hand, megafunds have also long been
viewed as a safe choice by many investors because
they carry a strong brand name. And that brand
name has been earned: raising more than $5 billion
in capital usually means the GP has delivered
outperformance in the past at a smaller scale. Mega-
fundsalsomakepragmaticsensetothegrowing
class of investors that need to put billions to work
quickly,asthesefundsaretypically raised by
the largest firms, which offer a strong promise that
the capital will be deployed. The firm that gets
the money is not always the firm that produces the
best returns; sometimes, it is simply thefirm
Exhibit 4
PE annual report
Exhibit 4 of 20
Measured by pooled returns, megafunds have outperformed
since 2008.
Source: Cambridge Associates; Thomson One; McKinsey analysis
Global private equity pooled returns by fund size relative to
public market equivalent, percentage points
Top- and bottom-
quartile variation
from the average,
percentage points
–2
–1
–4
–6
–5
–3
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013
Megafunds
Large-cap funds
Mid-caps funds
Small-cap funds
±3.2
±5.0
±5.5
±7.3
Public market equivalent

9
that can deploy such large amounts of capital. At the
same time, some LPs have sought to rationalize
their networks of external managers—which in many
cases numbered hundreds of GPs, with thousands
of underlying portfolio companies—creating pressure
for larger individual tickets. As a result, oppor-
tunities to write a much bigger check than usual are
more attractive than ever.
How do these pros and cons balance out? Can the law
of large numbers be overcome? Investors have
voted with their dollars and surged into megafunds.
And it now appears that megafunds have also
deliveredsuperiorreturnsonaverage.Inotherwords,
if there is a law of large numbers, these numbers
must not yet be large enough to be held back. The
data suggest that since 2008, the average megafund
has outperformed other fund sizes—and also
outgunnedpublicmarketequivalents(Exhibit4).
As megafund performance has given LPs comfort,
the question “why allocate to a given firm?” has
shifted a bit toward “why not?” for some firms in
this echelon. To many sophisticated investors,
however, from pensions and endowments to family
offices, mid-market continues to be a beacon of
performance. The spread of mid-market returns is
much larger than for megafunds, such that the
best funds can outperform the average IRR by a wide
margin. And while mid-market entails a greater
Going strong
Exhibit 5
PE annual report
Exhibit 5 of 20
Large firms that diversified into other private assets have thrived.
1 Includes fundraising in private equity only, and includes 2 firms that are now defunct.
Cumulative private equity1
fundraising 2000–17 for 20 largest firms as of 2000, $ billion
Multi-asset-class firm Single-asset-class firm
20
10
0
2000 2001 2002 20052003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
40
60
80
100
30
50
70
90

level of selection risk, LPs will continue to lean on
relationships with managers they trust to out-
perform in coming years.
More broadly, 2017 represents a rapid quickening of a
long-running trend in which fund sizes have grown
across private markets. Small funds of less than $500
million—36 percent of the capital raised in 2010—
were down to 20 percent in 2017, while funds of more
than $5 billion rose from 7 percent of 2010’s total to
30 percent of 2017’s. The largest GPs have raised
these funds across private asset classes, extending
their brands and capabilities beyond PE to meet
increasing demand from LPs. While the brand name
and track record of PE success clearly supports
these GPs in their efforts to raise large funds in other
private markets asset classes, the multi-asset
class offering appears to have a positive feedback
loop on PE fundraising. As Exhibit 5 suggests,
the PE firms that went multi-asset class raised more
money in PE; they built institutions at scale, and
scale they have.
The rise of US megafunds was nearly matched
in Europe, where several firms successfully closed
big new funds totaling $40 billion, and in Asia,
where megafunds—previously close to nonexistent—
contributedmorethan$20billionofthe$60billion
raised in 2017. Asia megafunds too are skewing to PE
buyout, rather than other asset classes.
Despite the strong showing of megafunds in Europe,
however, total fundraising slowed, growing at just
2 percent in 2016–17, well below the 21 percent rate of
the previous five years. Concerns over Brexit and its
impact on asset prices contributed to the fundraising
slowdown in Europe. As investor confidence rose
in the second half of 2017, some of the void may have
been filled, as North American managers turned
their attention to Europe.
Private debt: Where banks fear to tread
Funds raised to invest in private debt grew by
10 percent last year, to more than $100 billion, reach-
ing a peak last seen in 2008. Most of that growth
happened in Europe (up 26 percent) and in Asia (up
200 percent, off a low base).
Several factors are at work here. The takeoff in debt
indicates that private markets are increasingly
seen as a good alternative to banks, particularly in
India and China, where banks have been over-
whelmed with nonperforming loans. Similarly,
public debt markets are not deep in many
parts of the world. As access to bank loans and
high-yield issuance diminishes, private debt
investors step in to fill the void. Funds created to
lend directly (as opposed to investing in distressed
or special situations, or mezzanine) raised
51 percent of all private debt capital in 2017, a sharp
increase from 25 percent last year. Furthermore,
many LPs see deteriorating returns in their fixed-
income investments, and view private debt as
having a similar risk profile with higher yield
potential. Some also see private debt as a less risky
way to play PE—investors get a more favorable
part of companies’ capital structure, and do not
have to settle for substantially lower returns.
Another factor, diversification, is always a con-
sideration, and private debt offers a way for
some to spread their bets.

11Going strong
In Europe, many PE firm leaders are excited about
private debt and view it as an opportunity for
their own diversification. In their mind, private debt
is well positioned to fill the void in mid/small-
cap financing while producing healthy returns for
lenders, though lower than in PE. It’s no surprise,
therefore, that many LPs have asked their external
managers to extend into private debt, and we
expect this trend will continue.
Real estate: More than meets the eye
Given its long duration and yields that have exceeded
fixed income, RE is widely viewed by LPs as a
particularly attractive fit with their needs. With
capital surging into private markets, it is no
surprise that RE has grown—even though closed-
end fundraising (which we use throughout this report
for the sake of consistency across asset classes)
shows declines in 2016 and 2017. Given the role that
RE can play in the portfolio, capital has moved
out of closed-end funds and into other structures.
The big story in RE recently is a shift down the risk
curve. While investors have historically viewed
RE as a source of alpha, more and more are coming
to see it instead as a source of income, and have
adjusted their RE portfolios accordingly. Many are
shifting to core, which grew 10 percent annually
from 2012 to 2016, faster than most other strategies
(Exhibit 6). In a yield-starved world, a less risky RE
asset that produces 5 to 7 percent annual returns
is compelling to many investors.
Exhibit 6
PE annual report
Exhibit 7 of 20
Real estate fund ﬂows are shifting to lower-risk strategies.
Real estate assets under management by strategy, 2012–16, %
2012–16 CAGR, %
Value added
100% = $2.324 trillion $3.079 trillion
Core
Opportunistic
Securities
Debt
26
3
4
17
16
38
19
21
13
Note: Estimates include global institutional and retail securities under management.
Source: eVestment; IPD Global Fund Index; IREI; NFI-ODCE; Preqin; Simfund
2012 2016
43
7.3
17.8
14.4
–0.1
–0.1
10.5

A second important theme is the growing impor-
tance of liquidity and discretion. Within core RE, for
example, up to 90 percent of AUM is now held
in SMAs and in open-end funds (Exhibit 7). These
vehicles, which provide more liquidity and more
precise choices for LPs, have driven the growth in
core, the fastest growing of the traditional RE
strategies. Debt funds and listed securities (REITs,
traded both actively and passively) have also grown,
at the expense of traditional closed-end funds.
Many GPs are now in the process of figuring out how
best to match the evolving needs of their LPs. RE
managers that can provide strong, less risky returns
and offer liquidity in an essentially illiquid asset
class will do well. Over time, we may see RE and
infrastructure begin to supplant the fixed-income
allocation in many investor portfolios, as those
dollars shift to low-risk, core, and core-plus styles
of RE investment.
PE, private debt, and RE are the three largest private
asset classes. But there were interesting develop-
ments elsewhere. In infrastructure, fundraising fell
in 2017, but that is misleading. Since 2016, some
ofthelargestGPshaveraisedrecord-breakingfunds
for traditional, brownfield infrastructure
strategies.Judgingbythehealthynumberoffunds
expected to close in 2018, it is clear private
infrastructureremainsveryappealingtoinvestors.
Exhibit 7
PE annual report
Exhibit 6 of 20
Market share of closed-end funds has decreased.
Real estate core gross assets under management by structure, 2012–16, %
2012–16 CAGR, %
Open-end
100% = $882 billion $1.313 trillion
Separately
managed
accounts
Closed-end 15
26
59
11
26
Source: eVestment; IPD Global Fund Index; IREI; NFI-ODCE; Preqin; Simfund
2012 2016
63
2.7
10.5
10.4
12.2

13
Fromaregionalperspective,EuropeandNorth
America combined raised more than $50 billion,
mostly targeting vast projects to renew and
expand existing assets. In today’s low-yield environ-
ment, investors will continue to seek infrastruc-
ture opportunities. The outstanding question is not
demand, but supply; while many new projects
are seeking investors, public–private partnerships
and privatization opportunities globally are
harder to find.
With fundraising so strong, private AUM also set a
record. To be sure, AUM remains a somewhat
abstract notion in private markets. Apart from the
usual opacity of privatelyheldcompanies,the
industrytypicallydoes not report on so-called
shadow capital, which includesLPcommitmentsto
separateaccountsas well as co- and direct invest-
ments; nor does it report fully on capital deployment
and exits. AUM reached a record level of $5.2 trillion
in 2017, up 12 percent from 2016’s $4.7 trillion
(Exhibit 8). After growing gradually for many years,
AUMacceleratedin2015–17,asthe(muchsmaller)
funds raised during the great recession (2008–09)
cleared the cycle.
Come together
As we discussed last year, we see evidence of nascent
consolidation of capital into the biggest funds,
as the largest funds account for more and more of
Exhibit 8
PE annual report
Exhibit 8 of 20
Assets under management now total ~$5.2 trillion.
Private market assets under management, 2017, $ billion
Rest of world
North
America
Asia
Europe
924
505
158
58
469
210
93
38
418
168
39
363
84
63
25
12
190
28
107
28
28
15
121
37
191
180
1,645 810 637 535621 178385 419
134
44
61
36
Buyout
Private equity
Real estate Private debt Natural
resources
Venture
capital
OtherGrowth Infra-
structure
327
76
Going strong

the industry’s fundraising (Exhibit 9). Logic
would suggest the same would be true for firms—in
other words, that the largest firms would start
to collect and control more of the industry’s total
capital. But as of last year, we did not have
sufficient evidence to make that claim. Why? We
reasoned that, while the biggest firms are inarguably
getting bigger, the cyclical nature of fundraising
means that their growth might not show up clearly
for some time, as not every big firm consistently
raises a new flagship fund every year. Furthermore,
the industry has a long tail of thousands of
small firms; changes in the capital they absorb
could obscure developments in the largest
firms. And if we look instead at the number
of private managers for evidence of consolidation,
we won’t find it, as the number of firms grows
every year.
However, the latest data suggest the beginnings
of consolidation of capital, not only in PE, but
across private asset classes. Exhibit 10 shows that,
though the share of fundraising that goes to
the top 20 private markets firms has been in steady
decline for years, it has risen sharply since 2015,
coinciding with the rise of megafunds. Two years do
not make a trend, but this could be the start of a
longer-term shift.
Exhibit 9
PE annual report
Exhibit 9 of 20
Large funds continue to absorb a greater share of funds raised.
1 Private equity, real-estate private equity (ie, closed-end funds), private debt closed-end, natural resources closed-end funds, and
infrastructure closed-end funds. Secondaries and fund of funds are excluded to avoid double counting of capital fundraised.
Global private markets1
fundraising by fund size and year, % of total in-year fundraising amount
20
10
0
40
60
80
100
<$250 million
$250–500
million
$500 million–
1 billion
$1–5 billion
>$5 billion
30
50
70
90
2010 2011 2012 2013 2014 2015 2016 2017

15
And while data on shadow capital is limited, it is safe
to assume that the largest firms are also capturing
a disproportionate share of these funds. If the top 20
firms account for more blind pool capital than at
any point in the past 15 years, and they’re also raising
most of the shadow capital (a trend that was in
its infancy 15 years ago), then it follows that assets are
starting to consolidate at the top of the league table.
Consider this from another angle. Over the past
five years, most of the top publicly listed alternatives
managers have expanded their fee-earning AUM
faster than private markets overall. While not a com-
prehensive analysis, it offers another piece of
evidence that private market funds are beginning
to concentrate into fewer hands.
Going strong
Exhibit 10
PE annual report
Exhibit 10 of 20
Big firms’ share of fundraising has increased since 2015.
Fundraising market share across all asset classes, top 20 private market firms, %
10
5
0
2000
ø 32
2002 2004 2006 2008 2010 2012 2014 2016
20
30
40
50
55
15
25
35
45
2018
Top 20 firms
–2% per annum +24% per annum

So far, so good for private markets. The industry has
a record amount of capital. But what to do with
it? On that front, some signs of strain materialized in
2017. Deal multiples continued their steady climb,
while GPs came under pressure from LPs to use some
of their vast stocks of dry powder. Research sug-
gests that today’s record levels of dry powder may not
be the problem some suggest—but if deal activity
continues to stagnate, as it has for two years now, it
might soon be.
Deal activity: Getting choosy
In 2017, deal activity was mixed. Take PE,where
globaldealvolumeincreased14percent,surpassing
$1.2 trillion (Exhibit 11). Asia led the charge:
deal volume there jumped 96 percent, to $110 billion.
This dramatic growth is not surprising for the
region’s maturing PE industry and reflects several
larger deals in China, Korea, and Japan, many
involving B2B companies. Europe grew impressively,
at 30 percent. North American deal volume barely
budged, rising 1 percent, to $641 billion, again led by
deals in the B2B sector.
At the same time, however, global deal count declined
8 percent, to about 8,000. This marks a second
consecutive year of decline in the number of PE deals.
Every region suffered, although mileage varied.
In the United States, deal count dropped by 6 percent,
continuing a decline that began in 2015. Europe
experienced a sharper decline, with deals falling
11 percent. Asia fell slightly, by 4 percent, but
the largest fall was in Africa and Latin America,
which fell 14 percent, to about 390 deals.
Among specific sectors, energy experienced
the largest drop in deal count, falling by 30 percent,
reflecting uncertainty about commodity prices
Now comes the hard part

17Now comes the hard part
and the resilience of US fracking. B2B and B2C deals
were not far behind, falling 12 percent and 14 per-
cent, respectively, as PE firms ceded some ground to
strategic investors that reached down to acquire
smaller companies. Further, we witnessed a number
of corporate carve-outs at the end of 2017, driv-
ing more capital through fewer deals. Healthcare
declined slightly, about 5 percent. Several big
deals took place in home care and healthcare services,
driving total value higher, but the sector had
fewer deals overall. Information technology ticked
up sharply, increasing 10 percent as more and
more companies appreciated the step-change in
performance afforded by digital transformations.
Exhibit 11
PE annual report
Exhibit 11 of 20
Private equity deal volume was ﬂat, but deal count declined in 2017.
Source: PitchBook
Global private equity deal volume, 2000–17, $ trillion
Global private equity deal count, 2000–17, thousands
2000
0.19
2001
0.14
2002
0.16
2003
0.25
2004
0.38
2005
0.56
2006
0.91
2007
1.40
2008
0.71
2009
0.30
2010
0.57
2011
0.70
2012
0.71
2013
0.82
2014
1.04
2015
1.17
2016
1.11
2017
1.27
2000
2.2
2001
1.7
2002
1.9
2003
2.4
2004
3.3
2005
4.2
2006
5.5
2007
7.3
2008
6.1
2009
4.1
2010
5.8
2011
6.7
2012
7.0
2013
7.0
2014
8.4
2015
9.0
2016
8.8
2017
8.1
+14%
–8%

The falling deal count reflects a few factors.
First, deal size has increased, driven mostly by
multiples, making each deal a more significant
commitment for GPs. Second, targets are harder
to find and some (though not all) GPs are more
cautious, pursuing only those deals where they
think they can realistically achieve attractive
IRRs. Many GPs recall the lessons of the last PE
boom, when too much capital was deployed
at too-rich multiples over too brief a time—now
investors are trying to balance the pressure
to deploy capital with the goals to remain disciplined
in valuation and rigorous in process. And in
some regions, such as Europe, a growing number
of PE-sponsored IPOs could be displacing
sponsor-to-sponsor sales.
Multiples: Ever higher
With deal volume increasing and deal count
dropping, average deal size has risen—by 25 percent
this year. About two-thirds of this increase is
due to growing multiples (Exhibit 12); the remain-
ing third might be said to be organic, as it is
explained by acquisitions of larger targets that
generate higher EBITDA.
As Exhibit 13 shows, multiples are on the rise—for
severalreasons.Startwithpublicmarketcomparables.
Although private assets are used to diversify from
public markets, they are not unconnected. The public
markets are hot—some recent wobbles notwith-
standing—and that’s been driving comparables’
valuations to new heights. Further, private buyouts
Exhibit 12
PE annual report
Exhibit 12 of 20
Average deal size increased 25% in 2017.
Global private equity average deal size, 2016–17, $ million
Source: PitchBook; McKinsey analysis
2016 2017
126
15811
21
Growth
driven by
multiple
increase
Growth
driven
by ticket
size
+ 25% per annum

are a small fraction of total M&A, whose dynamics
are heavily shaped by strategic investors. The low-
cost debt environment of the past decade encouraged
strategics to open their pocketbooks and quickly
expand through inorganic growth. In so doing, they
are competing directly with PE for deals and
pushing multiples ever higher. Another factor: within
private markets, record fundraising means
there’s more competition for good deals. Finally,
the ongoing availability of cheap debt is driving
up leverage levels.
The difficult environment has concentrated minds.
GPs are making fewer investment choices, zeroing in
on targets where they can still earn an attractive
IRR—though what constitutes attractive is under-
going revision, as many firms lower their hurdle
rates. Our discussions with industry leaders suggest
that these are companies in which the GP has
subject-matter expertise, opportunities to extract
synergies, or strong conviction about market
upside potential.
Dry powder: How much is too much?
With competition rising and deals hard to find,
GPs’ stocks of uncommitted capital, or dry powder,
reached a record high of $1.8 trillion in 2017
(Exhibit 14). That was up 9 percent year on year;
Exhibit 13 Private equity deal multiples continue to rise.
PE annual report
Exhibit 13 of 18
Global median private equity EBITDA multiples, 2006–17
Debt/
EBITDA
Valuation/
EBITDA
Equity/
EBITDA
5.6
3.4
9.0
4.6
3.3
7.9
4.0
3.9
7.9
5.0
3.5
8.5
2.8
2.8
5.6
3.9
3.1
7.0
3.8
3.6
7.4
3.6
3.2
6.8
5.2
5.5
10.7
3.7
4.5
8.2
4.5
4.7
9.2
5.2
4.1
9.3
Source: PitchBook
2006 131207 09 10 1108 201715 1614

indeed, dry powder has grown by 10 percent on
average every year since 2012.
Does the industry have too much capital? Probably
not, or at least not yet. If we compare dry powder
to other measures, such as funds raised and AUM,
“stocks” of capital available for investment have
changed little over the past few years vis-à-vis the
size of the industry. Dry powder as a percentage
of in-year fundraising has been between 220 and 280
percent for the past six years. As a percentage of
AUM, dry powder has been similarly consistent, at
30 to 34 percent. Nor are there any significant
variations among asset classes, suggesting that GPs
are finding adequate opportunities in every field.
Furthermore, by the metric we introduced in the
2017 edition of this report, years of PE inventory on
hand, dry powder still seems adequate to deal
flow. If we divide dry powder by deal volume on a
seven-year trailing basis, the industry seems to
have cycled through its capital in a stable way for the
past several years (Exhibit 15).
Exhibit 14 General partners’ stocks of dry powder reached a new high.
PE annual report
Exhibit 14 of 18
Capital committed and not deployed, 2000–1H17,1
$ billion
Total
Private equity
Private debt
Natural resources
Real estate
800
1,600
1,000
600
1,800
1,200
200
400
0
1,400
Infrastructure
1
Data not available for full 2017 year.
Source: Preqin
1H172010 2012 2014 20162002 2004 2006 20082000

Exhibit 15 Inventories of dry powder continue to appear stable.
PE annual report
Exhibit 15 of 18
Years of private equity inventory on hand,1
turns
1.5
2.5
2.0
1.0
0.5
0
1
Capital committed but not deployed, divided by deal volume.
Source: PitchBook; Preqin; McKinsey analysis
2006 1H17
In year
3-year trailing
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Nevertheless, the metric ticked higher in the past
year, given the continuing growth of dry powder
combined with the softening of deal activity. A con-
tinuation of this trend over the coming years
would be troubling and could force many GPs to
furtherreducehurdleratesaswellasdeploy
capitalin situations they otherwise would not.
Furthermore, if we factor in leverage on the
dry powder accumulated, the numbers begin to
reach eye-catching proportions. While the
industryhasmanagedinventoryquitewellsofar,we
may reach a point where the sheer magnitude
of capital that has to find deals becomes an issue.
Exits: Go time?
No discussion of deployment would be complete
without a word on exits. With multiples high,
exits have been relatively painless, so GPs have taken
advantage of the environment to sell. Continuing
the trend that started in 2011, distributions to LPs
exceeded capital calls; in the first half of 2017,
GPs returned $100 billion more to LPs than they
called in (about 30 percent more returned
than called in).
And yet, total value of exits in 2017 was nearly flat,
while the number of global PE exits continued
to decline (Exhibit 16)—the same dynamics we saw
in acquisitions.
Again, like acquisitions, average exit values were
higher in 2017, putting pressure on owners to
sell and capitalize on the frothy environment. In
response, North American GPs are increasingly

Exhibit 16
654
3,104
2015
529
2016
2,857
258
1,813
2010
516
2017
2,475
332
2,233
2012
330
2,125
2011
340
1,670
2006
360
2,424
2013
424
2,153
2007
216
2008
1,505
98
2009
1,077 588
2014
2,841
Value of private equity–backed exits was roughly ﬂat; the number
of exits fell.
PE annual report
Exhibit 16 of 18
Global private equity–backed exits, $ billion, number of exits
Source: PitchBook
1,000
600
0
800
2,000
200
2,500
1,500
500
1,000
400
3,000
3,500
0
Deal countDeal value
mimicking their European counterparts by
conducting vendor due diligence, in which sellers
seek to better understand and communicate
theircompany’svalueandgrowthpotentialtobuyers,
in an effort to leave less money on the table.
Some GPs we’ve spoken to wish to shorten their
hold periods and exit quickly. Broad industry data
does not yet reveal this trend, possibly because
it takes time to appear, or because some managers
are choosing to hold assets for longer than the
traditional four to five years.
More simply, the decline in exits might be a product
of cyclicality. During the crisis, exits nearly came to a
halt. To avoid realizing a loss or a low IRR, owners
put off sales until the market recovered. Portfolios
swelled, and the pent-up pressure was released
in 2014–15. With that, 2016–17 deal counts declined
to more sustainable levels.

23The march of progress
The march of progress
What’s next for this rapidly growing industry and
for the vital relationship between GPs and LPs? Our
experienceanddiscussionswithbothsidessuggest
that the relationship is healthy, but also changing as
allocations expand. As GPs build more discipline,
structure,andscaleintotheirprocesses(partofwhat
we call a firm’s “organizational spine”), they are
building a foundation that, among other things, can
accommodate massive capital inflows.
Changing dynamics and ten-figure mandates
As LPs vet external managers, persistency of
performance has emerged as an important topic to
consider, as it has weakened since the 1990s.
Previously, a successor fund to a fund that performed
in the top quartile had on average a 40 percent
chance of replicating the feat. New data, while not
definitive, suggest that number has declined to
an average of 30 percent in recent years. Moreover,
the likelihood of a successor fund dropping to
bottom quartile has quadrupled over the same time
(Exhibit 17). Indeed, follow-on performance is
converging towards the 25 percent mark—that is,
random distribution—but hasn’t reached that point
yet.Theseareearlysignsandarenotconclusive—
but are suggestive of a challenge for both camps, par-
ticularly for LPs and the process of manager
selection. It is also, to the earlier point on megafund
growth, a new wrinkle in LPs’ long-standing prac-
ticeofchoosinglarge,brand-namefunds.Anecdotally,
some savvy LPs believe that even where firm
persistence has declined, persistence of performance
among individual dealmakers is still quite strong.
At the same time, LPs have continued interest in
building co-investment and direct investing capabil-
ities, as a way to reduce cost and deploy capital. In
McKinsey’s recent LP survey, over 70 percent of LPs

stated an intention to build these capabilities.6 How-
ever, making this shift can be challenging, and
success depends on LPs’ governance model, capabil-
ities, size, and risk tolerance. The data show that,
whileLPshaveincreasedtheirco-investmentactivity,
few have become true direct investors. The value
of co-investment deals has more than doubled since
2012 (totaling $104 billion in 2017), but direct
investment has remained essentially flat, at around
$10 billion (Exhibit 18). A recent survey finds
something similar: the number of LPs making co-
investments in PE rose from 42 percent to
55 percent over the past five years, while the pro-
portion of direct-investing LPs barely grew,
from 30 to 31 percent. Both LPs and GPs have
found that co-investment has its challenges. For LPs,
not only are co-investments hard to scale, but
academic research shows significant variance in
returns, which can make it difficult to get
approval from investment committees for these
fast-moving transactions. For GPs, the resulting
slow pace of decision making is frustrating,
and the speed of deployment of commingled funds
has slowed commensurately.
So how are LPs and GPs tackling the challenges of
scale? One approach growing in popularity has
been increasingly large SMAs, sometimes called
Exhibit 17
20152000
Convergence in outcomes of successor funds suggests persistency
is falling.
PE annual report
Exhibit 17 of 18
Private equity funds’ quartile performance relative to immediate predecessor, %
9896
40
20
01
80
0
141210081995 02 0497 07 09
60
99 03 131105 06
Percent of
successor funds
Vintage year of successor fund
Q1 funds preceded by a Q1 fund Q4 funds preceded by a Q1 fund

25
strategic partnerships. Gradually, inexorably, and—
given their private nature—somewhat opaquely,
SMAs account every year for a larger share of private
markets’ capital under management.
One notable recent development is the super-sizing
of these SMAs, as LPs seek broader, deeper,
more strategic relationships with a smaller number
of trusted managers. These partnerships tend to
be characterized by larger allocations, “most favored”
fees, and increasingly, terms that reflect perfor-
mance across the entire relationship rather than in
individual transactions or asset classes. More
of these relationships now also feature longer-term
(or even “permanent”) capital; higher levels of
mutual transparency and collaboration, especially
in the context of co-investment; and in some cases,
a mix of commingled structures, SMAs,
co-investment, and even some exposure to
GP economics.
The LPs in these relationships are typically larger
pensions or SWFs seeking a streamlined way to
deploy capital at scale, and to develop or extend their
internal capabilities through training opportu-
nities for staff, access to the GP’s sector or regional
experts, detailed market views, regular access
to investors and executives, and even in some cases
in-depth bespoke research.
For GPs, the calculus involved in these mega-
mandatesisusuallymorecomplexthanjustattracting
Exhibit 18 Co-investment has increased signiﬁcantly.
PE annual report
Exhibit 18 of 18
Limited partner co-investment deal value,1
$ billion
1
Deﬁned as deals involving at least 1 LP and 1 GP.
Source: PitchBook; McKinsey analysis
20172012
40
100
50
30
110
60
10
20
0
70
90
80
Direct
investment
Co-investment
2013 2014 2015 2016

a bigger check at lower fees. One attractive feature
for GPs is the potential to reduce fundraising costs
by eliminating the friction of returning and
reallocating capital every few years. The relative
certainty of managing a set amount of capital
is especially enticing to publicly traded managers
with volatile fee streams. Those with more
predictable income tend to trade at higher multiples.
These benefits are enhanced if capital automatically
recycles back into the partnership. No less impor-
tant to GPs contemplating such relationships is the
benefitofhavingareliable“anchortenant”for
new investment products, which improves their
marketability, particularly if the LP is influential
with its peers.
Large strategic partnerships are still in their relative
infancy. Since 2011, several institutional investors
have structured such partnerships with a number
of private managers—in some cases, publicly
announcing the relationships, in others avoiding
publicity. Some partnerships have been very
broad—covering multiple asset classes, with innova-
tive fee terms and detailed capability-building
provisions—while others have effectively just been
mammoth SMAs.
The overall impact has been twofold. First, the rise
of strategic partnerships has accelerated the
industry’s shift away from the commingled fund as
the default organizing structure for external
management. The blind pool is far from finished, but
especially for larger LPs, it is now less often the
presumed approach. Second, strategic partnerships—
and billion-dollar-plus SMAs more generally—
areredefiningwhatitmeanstobeamongaGP’s“most
favored” investors. At many GPs, the days are long
gone when simply writing a larger check and
committing to a fund sooner meant an LP could
ensure preferential treatment. Effectively,
an elite scale that once topped out at gold now has
platinum and diamond tiers. As these relation-
ships multiply and scale rapidly (with some LPs now
contemplating mandates in the tens of billions
of dollars), the industry should expect these effects
to reverberate.
Organizing at scale
A second trend among both GPs and LPs is to
strengthen what we call their organizational spine—
a shift that takes activities once done as a sideline
by busy founders and professionalizes them, creating
a modern and efficient institution. Fundraising,
AUM,anddrypowderareatrecordlevels,producing
at least heightened deliberation if not discomfort
among both GPs and LPs. Both are taking a hard look
at the ways they work, to make sure that the
processes and approaches that succeeded in what
was, in many ways, a cottage industry will remain
suitable in an era of scale. Adding controls to
processescannotguaranteehighreturnsandcannot
by itself lead to blockbuster transactions. In
this people-driven business, it remains impossible
to legislate success. But greater process discipline
can help cut off the lower side of the returns
distribution, enabling investors to avoid the failures
of care that, for instance, held back net performance
of many GPs in the vintages of the last PE boom.
Billion-dollar-plus SMAs are redefining what it means to be
among a GP’s “most favored” investors.

27
Among other things, GPs are enhancing their spine
by trimming bloated back offices; formalizing
succession plans; better integrating analytics, digital,
and big data tools; and rethinking recruitment
of analysts and associates. Even better, many are
sharpening their risk-management processes,
which can protect firms from macroeconomic down-
side, including a possible slowdown of global
growth as well as rising interest rates. 2017 may not
have been that year—far from it—but the most
forward-thinking firms are always looking years
ahead at obstacles unknown, and limiting the
potential for careless investing behavior.
Riding the wave
Strategic partnerships and the emergence of the
organizational spinearetwostepsforwardfor
theindustry.But GPs in particular should consider
further moves, ateverystepinthedealcycle—
sourcing,diligence,operations, and exits—as they
seek to future-proof their deal-making for the
age of scale.
Next-gen sourcing. Attempts to improve sourcing
with analytics have been rare thus far, but early signs
are encouraging. Practitioners of analytics-driven
sourcing told us that they have found such methods
effective in industries such as consumer tech-
nology, where users’ posts may be a decent predictor
of a target’s attractiveness. Analytics can also be
used to comb company financials across sectors to
identify markers of untapped operational upside.
In general, they enhance rather than replace the
human process.
But analytics is not the only way for GPs to bring
discipline to sourcing. Instead of casting a wide net to
find opportunities—and coming up with only a few
that match their investment thesis—GPs can instead
make things happen by finding companies whose
potential well matches their playbook. That is, GPs
can identify broad themes, sometimes macro-
economic in nature, and through portfolio construc-
tion, gain exposure to and place bets on those
themes. For example, a firm that foresaw growth in
freight on a certain trade route might acquire a
stake in airlines that sell belly capacity on that route.
Or consider the real-estate strategies that underpin
several PE firms’ retail investments.
A third way to improve sourcing is to anticipate
economic and demographic shifts up and
down a business system. It’s possible to know,
for example, just when an emerging middle
class will upgrade its grocery purchases from
basics to more expensive fare.
Win at diligence. At current valuations, GPs increas-
ingly find themselves having to assess ex ante their
ability to improve the economics of the target, if they
are to exceed their hurdles. Operations-focused
diligence has become more common as a way for GPs
to gain confidence to underwrite these oppor-

tunities, in effect making a bet on both ends of the
industry’s J-curve. GPs exploit ops-focused
diligences as a new way to assess from the outside the
potential to improve a company’s operations,
in procurement, SG&A reduction, pricing, and other
areas. Some are even finding ways to apply clean-
sheet budgeting to estimate cost savings, without
much knowledge of what a company actually
spends. Deep operations expertise helps, obviously,
not only in such assessments, but also in develop-
ing conviction about the certainty of capturing these
gains. Such conviction can make all the difference
in assigning probabilities to the typical scenarios of
base case/upside/downside—and thus to placing
a winning bid.
Traditional commercial due diligence, like sourcing,
is also finding new efficiencies through technology,
particularlyforconsumertargets.Web-scrapingtools
not only piece together the historical evolution
of product pricing over time, as an input to growth
models, but can also conduct brand-sentiment
analysis on social-media posts. For assets with a sig-
nificant online presence, new tools can assess the
effectiveness of digital marketing spend and even the
rate of customer conversion on e-commerce sites.
Perhaps most importantly, these analyses can all be
conducted from the outside in.
Get serious about operational improvement. With
multiples at record highs, investors have two options:
pay the current price and hope for even higher
multiplesatexit,orpayalowereffectivemultiple by
underwriting specific expectations for operational
value add. The latter method is attractive in
theory to many GPs but difficult to execute in prac-
tice. Some managers have proven reliably able to
enhance portfolio company economics, but most are
still searching for a successful formula. They
should not be discouraged by their mixed track
record—in fact, they should redouble their
efforts, since if multiples remain high, operational
value creation will be all the more necessary.
They can start by looking for value within their own
portfolios. Too often, GPs hold on to under-
performing portfolio companies long past their
originally intended exit date, hoping for a
reversal of fortune. Yet a concerted effort to turn
such companies around, especially with new
approaches such as digital-first transformation, can
yield rapid success, as we have seen recently with
several portfolio companies in consumer-packaged
goods and retail.
A second approach for GPs—and a more important
one to debate—is whether to build internal operating
groups or hire externally. Certainly, some internal
operating groups have delivered strong value, partic-
ularly at firms with strong specialties in industries
or certain asset classes. However, when firms
venture off their turf by exploring a less familiar
industry or function, their specialized skills
are less valuable. The same holds true when firms
expand rapidly; experts have only so much time
in the day. And when firms attempt large-scale oper-
ational projects such as overhauling legacy systems
or digitizing or outsourcing big pieces of the
company, again internal capacity is often exhausted.
Moreover,someofthelargestinternaloperations
teams have been scaled back, because they were a
large fixed cost or ultimately too far below scale
to have sufficiently specialized expertise. Leading
firms supplement their operating capabilities
with helpfromoutside,andthusbringtobearafar
greaterrange of operational expertise than could be
accomplished within a leaner internal group.
The tough get going. Exiting a company with strong
ongoing potential can be frustrating for a GP
beholden to the holding period norms imposed by
most commingled fund structures. Often, GPs
strongly believe that a given investment will continue
to prosper beyond the normal holding period but
feel compelled to sell to meet the demands of LPs, or
other needs. In today’s climate, obeying these
rules may not yield maximum value. GPs may adapt

29The march of progress
their processes to highlight the value of retaining
control of some investments—for example,
calculating an optimal “handoff period” in which the
investment can move from its original fund to a
second fund with a lower expected IRR but also
lower fees charged to contributing LPs. We expect
demand will emerge for this type of investment
vehicle, as it becomes clear to investors that older
investments, particularly infrastructural ones
such as power plants, continue to have value-creating
potential. Alternatively, some GPs are experi-
menting with partial exits, selling much of the portfo-
lio company to LPs while retaining a sizable stake.
Exit cycles will begin to diverge from tradition. The
average global buyout holding period is around
five to six years, and, barring a significant downturn
in valuations, this average is unlikely to move
significantly (it has held more or less stable since
2010). However, longer tails at both ends will
likely emerge. On one end, exit cycles for investments
purchased at high multiples may reduce to as little
as two years, as firms cash in on multiple growth early
(especiallyiftheyanticipatemultipleswilldecline).
On the other end, GPs investing in assets naturally
suited to longer holding periods (real assets such
as infrastructure, natural resources, and RE) may
place them in evergreen funds, to create maximum
value for LPs that understand the benefits of
extending holding cycles for such investments.
As a wise man once said, a billion here and a billion
there, and pretty soon you’re talking about real
money. Private markets are awash in real money—
andthechallengesthatcomewithrapidgrowth.
We hope that this report provides useful ideas for
private investors to take advantage of today’s
benign environment, and build their defenses should
fortunes suddenly shift.
1 We define private markets as closed-end funds investing in PE,
real estate, private debt, infrastructure, or natural resources,
as well as related secondaries and funds of funds. We exclude
hedge funds and publicly traded or open-end funds.
2
Data cited in this report were produced by McKinsey and
by Cambridge Associates, Capital IQ, CEM, Coller Capital,
Dealogic, PitchBook, and Preqin.
3
“Why investors are flooding private markets,” September
2017, mckinsey.com.
4
See Robert S. Harris, Tim Jenkinson, and Steven N. Kaplan,
How Do Private Equity Investments Perform Compared
to Public Equity?, Darden Business School working paper,
number 2597259, April 2015, ssrn.com.
5
This report focuses on closed-end funds, or blind pools.
6
“A routinely exceptional year for private equity,” February
2017, mckinsey.com.

McKinsey’s Private Equity & Principal Investors Practice
To learn more about McKinsey & Company’s specialized expertise and capabilities related to private markets and
institutional investing, or for additional information about this report, please contact:
Fredrik Dahlqvist
Senior Partner, Stockholm
Fredrik_Dahlqvist@McKinsey.com
Aly Jeddy
Senior Partner, New York
Aly_Jeddy@McKinsey.com
Bryce Klempner
Partner, New York
Bryce_Klempner@McKinsey.com
Alex Panas
Senior Partner, Boston
Alex_Panas@McKinsey.com
Vivek Pandit
Senior Partner, Mumbai
Vivek_Pandit@McKinsey.com
Matt Portner
Partner, Toronto
Matt_Portner@McKinsey.com
Acknowledgments
Research and analysis
Dan Barak
Drew Clarkson-Townsend
Louis Dufau
Connor Mangan
Nicolas Sambor
Editing
Mark Staples
Media relations
James Thompson
James_Thompson@McKinsey.com
Practice management
Chris Gorman
Illustrations by Brian Stauffer

31
Further insights
McKinsey’s Private Equity & Principal Investors Practice publishes frequently on issues of interest to industry
executives, primarily in McKinsey on Investing. All our publications are available at:
McKinsey.com/industries/private-equity-and-principal-investors/our-insights
To subscribe, please write to Investing@McKinsey.com. Recent articles and reports include:
Personal genius and peer pressure:
Britt Harris on institutional investing
January 2018
Cashing in on the US experience economy
December 2017
From ‘why’ to ‘why not’:
Sustainable investing as the new normal
October 2017
Why investors are flooding private markets
September 2017
Impact investing finds its place in India
September 2017
The future is collaborative:
An interview with Adrian Orr
June 2017
European healthcare—a golden opportunity
for private equity
June 2017
A routinely exceptional year for private equity
February 2017

About McKinsey & Company
McKinsey & Company is a global management-consulting firm deeply committed to helping institutions in the
private, public, and social sectors achieve lasting success. For 90 years, our primary objective has been to serve as
our clients’ most trusted external advisor. With consultants in over 110 locations in over 60 countries, across
industries and functions, we bring unparalleled expertise to clients anywhere in the world. We work closely with
teams at all levels of an organization to shape winning strategies, mobilize for change, build capabilities, and
drive successful execution.
About McKinsey’s private markets team
McKinsey’s Private Equity & Principal Investors Practice is the leading management-consulting partner to
investors, managers, and other stakeholders across private markets. McKinsey’s work spans the full fund cycle,
including pre-financing, sourcing strategies, commercial and operational due diligence, post-investment
performance transformation, portfolio review, buyout/exit strategy, and firm-level strategy and organization.
We serve GPs in private equity, infrastructure, real estate, and beyond, as well as institutional investors,
including pensions, sovereign wealth funds, endowments, and family offices. McKinsey has a global network of
experienced private markets advisors serving clients around the world. For further information, please visit:
McKinsey.com/industries/private-equity-and-principal-investors

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