State of the European private capital market 2023

The 2023 survey was fielded coming off the back of four years of strong growth within the private markets space. Despite market conditions deteriorating in 2023, with challenged fundraising and limited deal activity, the sector has remained active and demand for talent remains consistent, if not quite reaching the levels of previous years. Preqin reports a 3.2x gap between supply and demand—the widest the industry has seen since the global financial crisis.¹ A recent conversation between Bain & Company’s Hugh MacArthur and Graham Rose also noted the gap: “Most fundraising ambitions have something in the range of 10% to 15% per annum growth in their target fund,” said Rose. “But at the end of the day … the amount of capital available to … private equity is growing closer to 8%. …And that implies that you have to go win share of that capital base.”² We have heard the term “equity crunch” recently, an echo of the previous financial crisis having been dubbed a “credit crunch.” 

We have seen firms tackle this limited capital base in different ways. Many are pushing into the retail investor market for the first time, looking to break into the large pool of capital held by retail investors globally. Firms have also pushed into the wealth and family office client space, seeking to attract ultra-high-net-worth individuals (UHNWIs) or utilize private banking platforms to gain access to a new LP base, one where the appetite for private markets products continues to grow. Finally, firms are targeting insurance companies, whose balance sheets represent a significant amount of capital, particularly in Europe, which is currently limited in its exposure to private markets products—other than credit. Many anticipate regulatory barriers will soon be reduced, potentially creating a large pool of capital that could be invested into private markets products.

In that context, and even as overall hiring has slowed, we have seen an interesting shift in the demand for talent: from more pre-partner level hiring to increased senior-level hiring. Firms are now looking for team leaders and culture setters that have the ability to effectively coordinate deal teams and set high standards across the board. This is partly due to the number of businesses entering private markets increasing but is also because many existing GPs are working to future-proof their teams for the next cycle of capital, allowing them to remain competitive in a market that is becoming increasingly saturated. With this, the requirements for these leaders are growing—it is no longer enough to be a skilled investor or fundraiser alone. As deal flow has slowed and with valuations still high and leverage expensive, firms are using this lull as an opportunity to stabilize its teams for the future and make cultural progress in areas such as DE&I.  

Indeed, while DE&I in private markets is in its infancy compared to other industries, we are seeing a genuine desire from leaders to make progress. However, the nature of the culture—one in which work is often all-encompassing—can be a barrier. We still see, for example, retention drop significantly for women around child-bearing age. And a recent McKinsey & Company report notes that, “At almost every level, women in investing roles are promoted at significantly lower rates than men. Globally, men in investing roles are about 50% more likely, on average, to be promoted than their female colleagues, a trend that persists across all levels in investing roles.”³

This is reflected in our survey results. At the associate and principal levels, we see compensation parity. But at the managing partner/partner level, the earnings men report are almost double those women report. Though the scarcity of women in the senior ranks might suggest that those who are there could command premium compensation, some are not in full-time roles and few are founding partners, both of which affect compensation.

In terms of compensation overall, for the first time in more than half a decade, carried interest valuations are coming down. One explanation for this could be the lack of exits this year, with many firms unable to realize performance of their assets given the high-interest-rate environment has reduced deal flow. This creates a cycle in which firms struggle to exit portfolio companies, creating limited returns to LPs, and then, in turn, firms struggle to raise capital from existing or future LPs.

Looking forward, an anticipated change in the United Kingdom’s government may affect UK-based private equity professionals. One of the headline policies of the Labour Party—which many expect to come into power in 2024—is to tax carried interest at the rate of income, rather than capital gains. It is too soon to know the effects of this policy, but some fear it could drive private equity talent to leave the United Kingdom, creating instability.

To read the full report, download the PDF.

About the authors

Tom Thackeray (tthackeray@heidrick.com) is a partner in Heidrick & Struggles’ London office and a member of the global Private Equity Practice.

Henry Price-Haworth (hpricehaworth@heidrick.com) is a senior associate in the London office.

Acknowledgments

The authors wish to thank Mohd Arsalan for his contributions to this report.

References

¹ Or Skolnik, Brenda Rainey, Greg Callahan, Mónica Oliver, and Alexander De Mol, “Taking Private Equity Fund-Raising to the Next Level,” Bain & Company, July 17, 2023.

² Hugh MacArthur and Graham Rose, “Level Up Your Fund-Raising Game,” Dry Powder: The Private Equity Podcast, Bain & Company, October 19, 2023.

³ Pontus Averstad, Fredrik Dahlqvist, Eitan Lefkowitz, Alexandra Nee, Gary Pinshaw, David Quigley, and Mohammed Shafi, The state of diversity in global private markets: 2023, McKinsey & Company, August 22, 2023, p. 12.