Key Takeaways
- • Private markets AuM grew at a 13% CAGR over the 10 years to 2021, reaching $10.3 trillion, and is projected by Preqin to reach $17.8 trillion by 2026 (12% CAGR).
- • Fee-related earnings, derived from long-term locked-up capital, grew at a 26% CAGR over 2018-21 with a stable sector FRE margin of 53%, according to Citi.
- • Private equity was the best performing asset class in the post-GFC period through 3Q21, with returns showing a 99% correlation with the S&P 500 over 2008-3Q21, per Citi analysts.
- • North American private assets posted the largest increase (4.0x) since 2007, followed by Europe (c3.5x).
- • Citi flags fundraising dependency, competition, and exit environment as the principal risks to sector growth.
Summary
Private markets have expanded rapidly. According to Preqin estimates cited by Citigroup, assets under management grew at a 13% compound annual growth rate over the decade to 2021, reaching $10.3 trillion. Growth is expected to continue at a 12% CAGR, bringing AuM to $17.8 trillion by 2026.
Fee-related earnings are the principal income source for alternative asset managers. Because management fees are derived from long-term locked-up capital, these earnings streams tend to be largely insulated from broader market movements. Citi data show sector FRE grew at a 26% CAGR over 2018-21, with the FRE margin holding steady at 53%.
Citi analysts identify several challenges. Sector AuM and profit growth depend on fundraising, and a shift in demand or a reduced ability to deploy capital could delay managers' ability to raise future funds. Strong growth has also intensified competition, which could affect fundraising. Finally, exits are essential to crystallising returns, and exit conditions become difficult when markets fall or become unusually volatile.
Citi's return analysis shows private equity as the best performing and returning asset class from end-2007 through 3Q21, followed by secondaries, with private assets slightly outpacing public markets. Over 2008 to 3Q21, private equity returns had a 99% correlation with the S&P 500 and 98% with the MSCI All Country World index. Aggregate private assets, of which roughly 65% is private equity, 12% real estate and 12% private debt, rose 4.0x in North America and about 3.5x in Europe.
Valuations have also risen. According to the report, the median US buyout entry multiple increased from 9.0x to 13.1x EBITDA over 2010-20, while Baird data show average European entry multiples rose from 12x to 15x over 2018-21. Deal mix shifted as well: 2020 saw more deals in higher-multiple sectors such as technology, while 2021 saw more activity in lower-multiple sectors such as manufacturing as sellers who had previously been reluctant to exit returned to market.
Fee-related earnings are the principal income source for alternative asset managers. Because management fees are derived from long-term locked-up capital, these earnings streams tend to be largely insulated from broader market movements. Citi data show sector FRE grew at a 26% CAGR over 2018-21, with the FRE margin holding steady at 53%.
Citi analysts identify several challenges. Sector AuM and profit growth depend on fundraising, and a shift in demand or a reduced ability to deploy capital could delay managers' ability to raise future funds. Strong growth has also intensified competition, which could affect fundraising. Finally, exits are essential to crystallising returns, and exit conditions become difficult when markets fall or become unusually volatile.
Citi's return analysis shows private equity as the best performing and returning asset class from end-2007 through 3Q21, followed by secondaries, with private assets slightly outpacing public markets. Over 2008 to 3Q21, private equity returns had a 99% correlation with the S&P 500 and 98% with the MSCI All Country World index. Aggregate private assets, of which roughly 65% is private equity, 12% real estate and 12% private debt, rose 4.0x in North America and about 3.5x in Europe.
Valuations have also risen. According to the report, the median US buyout entry multiple increased from 9.0x to 13.1x EBITDA over 2010-20, while Baird data show average European entry multiples rose from 12x to 15x over 2018-21. Deal mix shifted as well: 2020 saw more deals in higher-multiple sectors such as technology, while 2021 saw more activity in lower-multiple sectors such as manufacturing as sellers who had previously been reluctant to exit returned to market.
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