Traditional asset managers race to expand private investment alternatives

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

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

For the fund managers, private assets are appealing because they typically command higher fees and lock up investors’ capital for several years. But robust client demand is also a tailwind, as investors seek to juice up their returns and diversify away from their core holdings in equities and bonds, now that the 60/40 balanced approach — previously a mainstay of investment portfolios — is facing some serious strain.

Amid a similar trend sweeping across the US, European groups including Amundi, Schroders, Fidelity International, Edmond de Rothschild Asset Management and Abrdn have flagged private assets as a key area for expansion. They are turning to acquisitions and aggressively hiring, resulting in a fierce talent war between mainstream asset managers, alternatives specialists, and pension funds that are trying to build expertise in-house.

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

“Private assets are an area of high client demand,” says Georg Wunderlin. global head of private assets at Schroders, which last year bought a 75 per cent stake in renewable energy specialist Greencoat for £358mn, and vowed to double the size of Schroders Capital, its private capital business, to £86bn by the end of 2025. “It’s important in terms of asset allocation. Alternatives have stopped being alternative — they are core for our clients.”

Data provider Preqin predicts that the overall size of the private capital industry will grow from over $10tn last year to almost $18tn by 2026. Goldman Sachs forecasts that it could even grow to as much as $30tn by then, noting that the retail and wealth markets are key areas where fund managers could make inroads with private capital strategies.

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

On the institutional side, these strategies are well-suited to customisation for clients — such as liability matching or targeting non-financial goals for an investment, like social impact.

The opportunity set of potential investments within private capital has surged over the past decade or so.

Since the financial crisis, there has been a structural shift in how the economy is financing itself. “Large parts of the economy are now financed by the balance sheets of asset managers and private equity in a way that used to be financed by the banks,” says David Hunt, chief executive of investment management business PGIM. “This has resulted in huge opportunities in private assets for investment managers.” 

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

Fund managers are also touting some private assets strategies as a hedge against rising inflation. “With inflation becoming a theme again, these strategies keep their pricing power,” says Christophe Caspar, chief executive officer, 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 a part of the debt is linked to inflation, offering some protection for investors.

But sceptics caution that the push by mainstream asset managers into private assets is fraught with potential challenges.

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

“We’re entering a stage where valuations and activity levels have been high,” says Andrew McCaffery, global chief investment officer at Fidelity International, which entered the private credit market last year and has been expanding the team. “This is more of a challenging world.” 

Others point out that, culturally, mainstream asset managers are very different to private capital businesses, with different pay structures, timeframes and decision-making processes.

“Private assets are much less liquid and so, if you buy badly, you’re stuck with bad investments for much longer,” says Julia Hobart, a partner at consultant Oliver Wyman in London. “The ramifications of getting it wrong are much higher.”