Traditional asset managers rush to expand private investment alternatives

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Last month, Franklin Templeton agreed to buy Alcentra, one of Europe’s largest credit managers, from BNY Mellon for up to $700 million. The deal marked the latest in a series of acquisitions in one of the hottest areas in the asset management industry: private assets.

Traditional asset management groups have been scrambling to broaden their offerings in these alternative investments – a broad spectrum that includes private equity, private debt, infrastructure, real estate, venture capital, capital growth and natural resources.

For fund managers, private assets are attractive because they typically incur higher fees and lock in investors’ capital for several years. But strong client demand is also a tailwind, as investors seek to increase yields and diversify away from their core stock and bond holdings, now that the 60/40 balanced approach – which was previously a mainstay investment portfolios – faces serious constraints. .

Amid a similar trend in the US, European groups such as Amundi, Schroders, Fidelity International, Edmond de Rothschild Asset Management and Abrn have singled out private assets as a key area for expansion. They are turning to acquisitions and hiring aggressively, resulting in a fierce war for talent between traditional asset managers, alternative solutions specialists and pension funds trying to develop their expertise in-house.

The business case for traditional houses is clear: they must increase profitability and tap into new avenues of growth at a time when cheaper exchange-traded funds are taking market share and downward pressure on fees is eating away at their margins.

$18tn-$30tn

Estimated size of private equity industry by 2026, from $10 billion in 2021

“Private assets are an area of ​​high customer demand,” says Georg Wunderlin. global head of private assets at Schroders, which last year bought a 75% stake in renewables specialist Greencoat for £358m, and has pledged to double the size of Schroders Capital, its private capital, to £86bn by the end of 2025. “It is important in terms of asset allocation. Alternatives have ceased to be alternatives – they are at the heart of our customers.

Data provider Preqin predicts the overall size of the private equity industry will grow from more than $10 billion last year to nearly $18 billion by 2026. Goldman Sachs predicts it could even reach $30 billion by then, noting that retail and wealth markets are key areas where fund managers could make inroads with private equity strategies.

For example, Fidelity International bought a minority stake in Moonfare, a digital investment platform for high-quality private markets funds, and signed a distribution partnership to enable banks, family offices and their advisers to access funds from private markets on behalf of their clients.

On the institutional side, these strategies are well suited to personalization for clients – such as matching liabilities or targeting non-financial goals for an investment, such as social impact.

The pool of potential investment opportunities within private capital has grown over the past decade.

Since the financial crisis, there has been a structural change in the way the economy finances itself. “Large parts of the economy are now financed by the balance sheets of asset managers and private equity in a way that was previously financed by banks,” says David Hunt, chief executive of the asset management company. PGIM investments. “This has created huge opportunities in private assets for investment managers.”

Meanwhile, companies are staying private longer and the war in Ukraine has accelerated the urgency of the transition to renewable energy, with huge opportunities for private capital to step in and help fund change.

Fund managers also tout certain private asset strategies as a hedge against rising inflation. “With inflation once again becoming a theme, these strategies retain their pricing power,” says Christophe Caspar, CEO of Edmond de Rothschild Asset Management. He pointed to real estate debt strategies that can increase their rents to keep up with rising interest rates, or infrastructure debt funds, where part of the debt is linked to inflation, offering some protection to investors.

But skeptics warn that the push from traditional asset managers into private assets is fraught with potential challenges.

This puts them in competition with private equity groups such as KKR, Blackstone and Apollo, which have long track records of building large, diversified businesses over decades. In a gold rush to make inroads into private assets, valuations have surged and traditional groups risk overpaying for deals or talent.

“We are entering a phase where valuations and activity levels have been elevated,” says Andrew McCaffery, global chief investment officer at Fidelity International, which entered the private credit market last year and expanded the market. crew. “It’s more of a difficult world.”

Others point out that, culturally, traditional asset managers are very different from private equity firms, with different compensation structures, timelines and decision-making processes.

“Private assets are much less liquid and so if you buy badly you’re stuck with bad investments for a lot longer,” says Julia Hobart, a partner at consultancy Oliver Wyman in London. “The ramifications of a mistake are far greater.”

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