The highly anticipated private market's focus on the retail asset management industry is likely to spark a significant shift in the industry infrastructure, particularly on the administration side, urging market participants to embrace technology-driven solutions for competitiveness.
Current Outlook: Shaping the Future of Private Markets
In 2022, there was a (albeit small) decrease in capital commitments, and the trend is expected to continue in 2023. However, a staggering $1.2 trillion was raised in 2022, contributing to the overall growth of the private market sector, which now stands at an impressive $12 trillion. Megafunds accounted for about 60% of the total global buyout capital raised, reaching a record high in 2022.
While the private market continues to gain prominence, representing 10% of total allocation, concerns arise regarding sustainable growth if new sectors, like retail, are not explored. Additionally, private equity firms face the demands of limited partners (LPs) for carbon pricing, impacting investment decisions and value creation, and highlighting the importance of environmental concerns.
How the next Decade might look: Key Trends to Consider
Great Rotation: Asset allocations are expected to shift from liquid to illiquid investments. Private market products will evolve, focusing on risk-return angles rather than pure investment strategies. Traditional and alternative managers will compete in solution-driven funds.
Big Getting Bigger: A few large players dominate a significant portion of the market, while new entrants have a minimal share. Successful GPs will add complexity and surpass traditional channels in capital raising efforts, with the retail sector playing a role.
Carbon as a Valuation Component: Carbon targets have become crucial across industries, impacting valuations and performance within private equity portfolios. Companies' environmental practices directly influence their value within a private equity portfolio, making carbon management a critical consideration.
Time for Retail?: Experts predict increased institutional capital allocation to alternative investments and individual wealth invested in alternatives. This points to growth in the retail sector, highlighting its potential.
Regulatory Impact and Industry Challenges:
As private equity firms anticipate increased assets under management (AuM) and expand investments for quasi-retail investors, there may be a need for greater regulation to protect investors and address issues like climate change. It is likely that public scrutiny will determine the level of government oversight and privacy in private markets, but the trend is likely to keep going in one direction.
Amidst the private market retail shift, Private Market participants must embrace cloud native applications for rapid adaptation. The current outlook reveals growth potential in the private market sector and emphasizes the need for sustainable strategies and environmental considerations. By leveraging technology and staying ahead of regulatory challenges, asset managers and servicers can navigate the changing dynamics and position themselves for success.
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