In the wake of initial public offerings globally falling 45 percent between 2021 and 2023, privately-held assets are booming.
Private market assets under management are expected to grow at about 9 percent annually through 2032, more than twice the rate of public market assets. By 2032, total private assets could reach at least $60 trillion, according to Bain & Co.
The reason, the consultant argues, is that private equity, private credit and other alternatives, “offer potentially higher yields, diversification, and in cases such as real estate, a hedge against inflation.”
There are many other reasons for the decline of public markets, including greater regulation of publicly held companies and the collapse of special purpose acquisition companies, which buoyed the IPO market until mid-2021. Private equity also takes public companies out of the market. But the rise of private capital itself has reduced the incentives for companies to go public, according to law firm Foley & Lardner. In addition, the firm said that “overpriced private financings have made IPOs less attractive.”
Asset managers are certainly eager to profit from the higher fees that can be charged on private investments. Bain estimates that fee revenue, which came in at $0.9 trillion in 2022, should double to $2 trillion by 2032. And while private equity and venture capital are the mainstay of private assets, Bain notes that private credit and infrastructure are growing fast.
Private credit, which grew 7 percent annually from 2012 through 2022, should grow between 10 percent and 12 percent annually by 2032, Bain estimates, saying the “accelerated pace largely reflects banks issuing fewer loans.”
Infrastructure grew 16 percent annually over the past decade and will grow between 13 percent and 15 percent annually over the next ten years, according to Bain. A shortage of public financing is driving private infrastructure investment.
Investor demand will also continue to grow, as sovereign wealth funds, endowments, and insurers along with other institutional investors are expected to increase their allocation to alternative assets by 10 percent annually over the next ten years. The biggest chunk comes from sovereign wealth funds, which could comprise 30 percent of the total by 2032.
That said, the recent difficulties of raising funds from institutional clients is leading asset management firms to try to attract retail investors with a variety of products.
Retail investors are drawn by diversification and higher returns, which translates into a 16 percent share of all private markets in 2022 to 22 percent in ten years. That would make retail investors the second largest segment of investors, higher than either pension funds or endowments.
Traditional asset management firms have been following investors into alternatives. Their share of alternative assets increased from 16 percent in 2018 to 22 percent in 2022. While some have made acquisitions, others have expanded organically. Bain noted that Fidelity Investments launched 18 alternative products in 12 months.
“Private markets have come into favor because the business models that have dominated asset management for years have nearly run their course,” authors of a recent Bain report wrote. Profit margins for traditional firms have dropped almost in half, from 15 basis points in 2007 to eight basis points in 2022. As a result of fee reductions, the median revenue at traditional asset managers dropped by 4 percent from 2021 to 2022, according to strategy consultant Casey Quirk, a business of Deloitte.
Listed stock funds have become commodities, with little differentiation between products. According to eVestment, which is owned by Nasdaq, the dispersion in returns between the top- and bottom-quartile stock managers is 1 percent to 2 percent; there is 4 to 6 basis point difference in fees between the top and bottom managers.
Private banks and wealth managers also have been expanding “to tap into client demand and higher fee income,” the report said. “Select firms are penetrating deeper into retail clientele with their own manufactured assets. Some have hired experienced advisers and wealth managers to target wealthy individuals.”
Both traditional and alternative asset managers are gearing up to become full-service providers across asset classes, investor types, and value chain positions. Bain suggests the competition will rely on firms “offering a niche product that generates alpha, such as environmentally-sustainable products in infrastructure for ultra-high-net-worth individuals” and developing scale in such areas as product creation and testing, distribution, and operational efficiencies such as risk management and compliance.
