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Asset management groups that made their names scouring public equity and debt markets for investment opportunities are now racing to pivot into opaque but lucrative private funds.
The sector’s largest players are striking bold acquisitions, unveiling novel partnerships with private capital groups, or working with their advisers to plot new strategies for their future. Many boardrooms believe they are engaged in no less than a fight for survival in an increasingly competitive investment landscape.
BlackRock, Franklin Templeton, and Capital Group in the US, as well as Amundi, Legal and General, Janus Henderson, and Schroders in Europe, are leading the push into unlisted assets.
For these managers, private asset funds come with the potential to earn fees that are higher than their existing public market funds. But they also expose clients — including wealthy individuals and retirement savers — to new risks.
Unlisted investments carry opaque valuations because their assets do not trade daily on public markets, making the returns of private market funds subjective and hard to understand. There are few industry standards for how the funds must value their assets and, as a result, disclosures can vary widely. Funds typically offer investors limited liquidity, also, when compared with mutual funds or exchange traded funds that can be fully bought or sold in minutes.
This limited ability to sell at any given point in time is a feature meant to protect investors from a wave of redemptions during a market panic. Such redemptions could force funds to sell assets quickly and at bad prices, ultimately to the detriment of a fund’s performance. Most private funds offer investors the ability to redeem 3-5 per cent of a fund’s net asset value in any given quarter.
And these sell-off risks have been shown to be very real in recent years. A handful of large property funds suffered heavy redemptions when investors grew fearful of the sharp rise in interest rates in 2022 and were forced to limit withdrawals. Despite this, industry executives believe that individual investors will continue seeking private assets.
“Most of the traditional asset managers are trying to figure out how to get into the alternatives space,” says Lawrence Calcano, chief executive of iCapital, a technology group used by financial advisers to access and manage private fund investments. “Some of the firms, like Franklin Templeton, have gone out and made a few big acquisitions,” Calcano notes. “Other people are figuring out how to partner with alternative asset managers. It is a trend we think is going to continue.”
BlackRock, the world’s largest asset manager, has pushed heavily into private markets this year, spending $25bn to purchase private infrastructure giant Global Infrastructure Partners and credit manager HPS Investment Partners. In 2021, Franklin Templeton acquired Lexington Partners, a specialist in buying private equity fund stakes, and T Rowe Price bought credit investment specialist Oak Hill Advisors.
But other large fund groups have found ways to create private fund products without striking expensive acquisitions. For example, in May, Los Angeles-based Capital Group struck a partnership with KKR, a pioneer of private equity buyouts, to give its clients access to alternative investments.
In Europe, asset management giants have made fewer large acquisitions, but firms have been increasingly active in launching private fund products.
In February, Amundi, Europe’s largest asset manager, paid up to €350mn to acquire Alpha Associates, a specialist provider of funds of funds that gives institutional investors access to private debt, infrastructure, and private equity strategies. Last month, the group launched an evergreen fund designed to offer unlisted investments to retail investors in Europe willing to commit at least €1,000 to the fund and accept limited liquidity rights.
Similarly, in July, Legal & General set up a private market fund designed to give its 5.2mn defined-contribution pension members “exposure to the illiquidity premium and growth potential of private markets”. The fund aims to mirror private investments that have long been a part of Australian pension schemes. In November, it announced that IFM Investors would manage its investments in areas such as sustainable infrastructure.
Industry experts say this push into private markets is coming as investors diversify their portfolios and seek access to a growing swath of companies that prefer to remain private.
The number of public companies in developed markets has been shrinking for decades because of high regulatory burdens. At the same time, the rising popularity of passive index funds has meant that there are fewer fundamentals-based investors, who make decisions based on companies’ intrinsic attributes, to properly value listed companies. Many fast-growing start-ups and profitable family-owned companies have preferred to take capital from private investors, instead of listing on public markets — making private funds the only way to invest in these growth opportunities.
Even so, Fraser van Rensburg, founder of Asante Capital Group, a London-based private markets advisory group, says the biggest obstacle to the popularisation of unlisted funds remains investors’ understanding of how they work.
“A lot of clients haven’t invested in private equity before — they are starting at pre-school,” he explains. “High net worth individuals are the first to knee-jerk change when there is some economic uncertainty. The bottom line is that [private markets funds’] redemption features and limited liquidity rights are the biggest obstacles to overcome.”
