After enjoying strong tailwinds over the past decade, private markets players have had to navigate a very different environment in 2023. This year will likely be remembered for the slowdown in buyouts, depressed exit activity and fundraising pressures that have followed the new macroeconomic reality of higher interest rates, rising inflation and slower growth.
According to Preqin, alternative investment funds have raised $740 billion between January and August of 2023, a 27% decline from the same period last year. This compares with $1.5 trillion raised in the whole of 2022.
Amid these challenges, 2023 has been marked by increased levels of consolidation among alternative asset managers as private markets entered a new phase of maturation. Another factor supporting the sector's growth has been the increasing involvement of retail investors, with funds continuing to converge towards retail and wealth channels.
In this article, we take stock of some key developments in private markets this year and discuss how they are likely to shape the outlook for the space in 2024.
1) Market consolidation is ongoing
321 (the total number of global asset management transactions as of October 2023, according to investment bank Piper Sandler1
- Consolidation in the private markets space continues this year as managers strive to expand assets under management and the fees they generate in a more challenging environment.
- Merger and acquisition (M&A) activity has also been driven by alternative funds' need to expand into new geographies, business lines and/or asset classes.
- A sample of deals in 2023 show alternative managers are looking to acquire new capabilities away from their traditional core competencies. We are observing the large, Private Markets managers seeking opportunities to diversify offerings, increase asset gathering and expand fee related earnings (FRE) margins.
| Date | Buyer | Core Competency | Target | Target Core Competency |
|---|---|---|---|---|
|
May 2023
|
TPG, Inc
|
Private & Growth Equity
|
Angelo Gordon
|
Real Estate & Credit
|
|
July 2023
|
Ares Management Corporation
|
Credit
|
Crescent Point Capital
|
Asian Private Equity
|
|
September 2023
|
CVC Capital Partners
|
Private Equity
|
DIF Capital Partners
|
Infrastructure Equity
|
- Traditional asset managers have been active this year in bolstering capabilities through the acquisition of alternatives managers. Private credit has been one of the most sought-after alternatives capabilities.
- A Citywire survey of private bank CIOs in July2, showed private credit was the main area of interest for investors increasing allocations.
- As rates rise globally and given the floating rate nature of private credit assets, the return profile of the asset class has become very attractive to investors.
| Date | Traditional AM Buyer | Target | Target Core Competency |
|---|---|---|---|
|
July 2023
|
PGIM
|
Deerpath Capital
|
US Middle Market Direct Lending
|
|
May 2023
|
BlackRock
|
Kreos Capital
|
European Private Debt
|
|
November 2023
|
Manulife Investment Management
|
CQS
|
Multi-Strategy Credit Platform
|
2) ELTIF reforms set to widen retail access to alternatives
90+ (the number of ELTIFs launched since 2015)
- After being enacted into EU law in 2015, around 90 European Long Term Investment Funds (ELTIFs) have been launched across Europe. This compares with approximately five Long Term Asset Fund (LTAFs) launched in the UK since the introduction of the LTAF regime in 2021.
- UCI Part II structures in Luxembourg have long been a preferred fund structure for GPs seeking to launch more liquid vehicles date.
- Further ELTIF launches are anticipated next year following the introduction of amendments to the ELTIF regime. Dubbed "ELTIF 2.0", these amendments include a broadening of the eligible asset scope and will enable managers to market to a broader range retail investor.
- Similarly, there is expected to be an uptick in LTAF launches following the FCA's recategorization of units in an LTAF, from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI), in June of this year. This should allow LTAF distribution to be extended to mass market retail investors.
- The growth in these products reflects asset managers' increased focus in widening the access of retail investors to alternative funds across Europe and the U.K.
3) Private Equity push into private wealth continues
50% (Percentage of top 10 global PE GPs which have dedicated private wealth distribution units)
- Alongside the creation of retail-orientated access funds, many general partners (GPs) are targeting retail investors through the standing up of focused distribution and client servicing units. The strategy aims at diversifying investor and capital bases.
- Another key driver is the so-called 'denominator effect' impacting existing institutional investors. Where volatile public market valuations have reduced the size of public asset portfolios, alternative allocations are now representing a larger proportion of the broader portfolio, limiting the scope for new allocations or re-ups to existing managers.
- Overall, retail channels represent a fresh source of capital where the denominator effect is not an immediate issue given retail investors are largely under allocated to alternatives.
- As GPs continue to increase the capital raised from retail channels, thought must be given to investor education, product suitability and liquidity for the asset classes being distributed.
- We have seen several issues with respect to the gating or closing of real estate funds, most recently, the announcement in October of this year of the intention to close the M&G Property Portfolio due to declining interest in open-ended daily dealing property strategies from UK retail investors.
Outlook for 2024
The development of more refined retail offerings and continued launch of retail-orientated access funds set the stage for greater convergence of retail channels within alternatives industry. We see the 2.0 regulations and dedicated wealth business units picking up steam in 2024.
We expect acquisition activity to increase in 2024 as alternatives managers continue to diversify and drive fee-related earnings (FRE) margin expansion. However, these acquisitions may lead to more complex operating models with differing investment capabilities, distribution channels and geographies being acquired. GPs will need to begin looking at greater integration efficiency and further optimize their operations.
Finally, as interest rates remain elevated, we expect private credit to continue to be a key focus area for growth amongst existing pure-play alternatives managers. We also expect to see further consolidation in the private credit market with traditional managers look to expand and augment private markets offerings.
Footnotes
1. https://www.pipersandler.com/insight/monthly-asset-wealth-management-report-october-2023
2. "Private banks eye bigger slice of private credit market", Citywire article, 19 Jul 2023
Originally published December 12, 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
