Private markets – the holy grail or a provider /buyer misapprehension?

30th December 2024

The great private markets race is on – at full speed. Respective media news, industry talk and product launches are everywhere. Private market giants are opening up to wealthy individual investors, while traditional asset managers have discovered private assets for broader propositions, more asset longevity and higher revenue streams. European regulators are also paving the way in the so-called democratisation of private assets. Nonetheless, in spite of all the alleged excitement, it is important to take a closer and more differentiated look.

Private markets, in particular private equity, enjoyed outstanding growth over the last 20 years – until 2022. Rising inflation and the consequent rise in interest rates have fundamentally changed the investment landscape. 2022 marked a bitter turning point and many private market players embarked on a journey from hubris to almost nemesis. Fundraising, worldwide and in particular in Europe, dropped sharply. Many private asset managers found themselves in an entirely new, literally unprecedented fundraising environment. Before, money was available everywhere for everyone.

Nevertheless, fundraising has not come to an entire stop. In fact, the world’s leading private market
managers continue to raise enormous amounts of investor monies. We have seen a number of staggering record asset raising announcements throughout 2023 and 2024. The gap between a few winners and many losers in capital raising widened to an extent never seen before. What happened?
In essence, borrowing and refinancing (a common practice in private markets) costs went up sharply with the rise in interest rates. At the same time, private market assets have been largely anchored in yesterdays valuations. while a lot of buyers are saying that this is a new world for pricing. In this context, Mans former CEO Luke Ellis stated in 2023 that “no one wants to be the schmuck who sells PE at a 30% discount.”

Moving beyond private equity, private debt is currently the asset class which draws most attention. Increasing bank regulation, capital requirements and sales of bank debt portfolios in a move to deleverage combined with high financing needs, provide almost a golden moment for asset managers, aiming to surf the de-banking wave. However, with the massive increase of asset managers buying private credit specialists, building up private debt units and products, there are also more critical voices and regulator unease emerging.

Private market giants going retail

After decades of institutional monies not only piling in but also queuing in some cases, private asset managers entered a new environment in 2022. Institutional money has not necessarily dried up, but past growth rates appeared out of reach. That’s where private wealth channels with an overall size of some USD 80 trillion has come in as growth targets. Unsurprisingly, firms like Blackstone, Ares Management, KKR or Apollo, to name just a few, have all set up dedicated divisions to target private wealth channels. Efforts undertaken so far are immense. Blackstone, the undisputed leader in this field, for instance, now employs well over 300 people, including around 50 persons in Europe, dedicated to private wealth across various European offices.

Traditional asset managers moving in

It are not only private market specialists aiming for a broader investor audience. Also, traditional asset managers are moving en masse into this space. For many, it appears, that private markets are the formula going forward. However, It is not an easy task to build up private market capabilities. Valuations for private asset capabilities and respective remuneration remain very high. Asset managers often pay multiples of 20+ times earnings, while available talent remains rare. Not to speak of the culture shock when it comes to integration. Sadly, we witness too many less convincing purchases, just to have the private asset capability on the shelf. Also, for most traditional asset managers this is a new field and they need to prove their worth.

But how about the buy-side appetite?

We have done a lot of ongoing work on trying to sense private market appetite in the European wholesale and retail space during the last 24 months. However, so far, no clear trend is visible. In fact, the picture is remarkably mixed, sometimes even within the same buyside account. Liquidity concerns and associated technicalities form obviously the elephant in the room. Interestingly, beyond private banking and multi family-offices, a number of independent wealth managers also stated that private clients interested in private markets do not necessarily need semi-liquid or much the discussed ELTIF structure to assess private markets, while others warmly welcome those.

All in all, in spite of a number of very valid concerns, private assets continue to serve an important market function. Also, there will always be winners, delivering superior output and also being able to raise a lot of assets. However, it has become much harder to generate alpha beyond illiquidity premiums and also more challenging for the buy-side to identify tomorrow’s winners.

This text was published in RankiaPro Magazine, Issue No. 20 | EUROPE DECEMBER 2024.