(Bloomberg) -- A wide variety of asset managers need to look at investing in private markets if they want to avoid wipe-out, while revamping their entire strategies to ride the wave, according to Bain & Co.
The business models relied upon by fund firms that have traditionally invested in public markets are becoming obsolete, with margins dropping to 8 basis points by 2022 from 15 basis points in 2007, and management fees declining as well, Bain said in a report Wednesday. As a result, many such companies are piling into private markets, an area that requires different capabilities and significant investment.
“It’s the biggest opportunity in financial services for the next few years,” Markus Habbel, head of Bain’s global wealth- and asset-management practice, said in a telephone interview. “Firms have to act now because the market for this opportunity is now.”
Bain expects private-market assets under management to reach as high as $65 trillion by 2032 and account for 30% of all AUM by then. Fee revenue for such investments are poised to double to $2 trillion over the course of a decade, according to the report.
Many asset managers that mainly invested in public markets have already embraced or are trying to expand into private-asset classes, with their share of alternative assets increasing to 22% in 2022 from from 16% four years earlier, Bain said. There is more work to be done though, according to the report, as they’re competing not only against each other but also against established alternative-asset managers, which are rapidly expanding their offerings to cover new asset classes and client groups.
And that trend has been intensifying recently. BlackRock Inc., the world’s largest investment firm, which focuses mainly on mutual and exchange-traded funds, has launched private-markets funds and gone on a buying spree, including a $12.5 billion deal for Global Infrastructure Partners. Janus Henderson Group Plc agreed last week to buy private-credit firm Victory Park Capital Advisors, and PGIM has said it wants to boost its private-market assets by more than 50% to $500 billion in the next five years. Even established alternative-asset managers have been expanding in areas of the asset class where they didn’t previously have exposure, such as infrastructure and private credit.
Succeeding in the field will not be easy for many firms, which may not have the cash or ability to make a splash in the market. Asset managers will have to rethink their business strategies and make big investments to develop large-scale production, increase distribution, boost risk management and compliance, and come up with niche products that give them an edge, Bain said. Firms also will need to do more to reach the growing market of wealthy clients, a labor- and cost-intensive task, the firm said.
“There will be huge differentiations between winner and losers,” Habbel said. “It’s not just about growing assets. The margins in private markets are much higher, so the opportunity is absolutely massive.”
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