Hello, I’m Michael. Welcome to AGM, the hub for private markets. I’m thrilled to bring you the AGM Alts Weekly, sent out every Sunday. In it, I dive into the ever-evolving world of private markets, dissecting news, trends, and the latest innovations. This newsletter is packed with useful content—from news articles and expert commentary to job listings at private markets firms. Plus, you’ll find recent podcasts and insights from Alt Goes Mainstream.
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Greetings from London! I’m here for a week filled with meetings and I’m speaking at a Citywire event alongside alternative asset managers. Finding oneself in the middle can be tough—just ask any middle child.
As private markets grow, the divide between the successful and the struggling seems to be expanding. Not long ago, Sujeet Indap from the Financial Times penned an opinion piece in Lex titled, “A thinning of the big private equity herd is coming.” He opened with a story from a recent investor event where a Goldman Sachs banker joked about private equity executives investing their last-ever funds without realizing it might indeed be their end. Indap raised various issues about the growing number of private equity funds, hinting it might lead to reduced returns, tougher fundraising, and eventually, market narrowing.
Fundraising has seen a slowdown recently. Over the last five years, the number of private equity firms surged by 50%, reaching a staggering 18,000 private funds in the U.S. Alone, as reported by the SEC, firms have faced challenging times in fundraising as of late.
Yet, funds raised today are significantly higher than a decade ago. Questions remain about which funds are attracting this capital. Blue Owl published insightful research earlier this year in their 2024 GP Strategic Capital Outlook. The study noted that the industry’s top 10 funds are grabbing most of the assets. This trend holds especially true in private equity, with over 25% of capital from 2022-2023 funneled to the top 10 managers.
Blue Owl’s September 2024 Pulse Check further underlines how the industry’s big players are reaping the most benefits. Funds raising under $1 billion have pulled in the smallest share of capital in comparison to those managing $1-5 billion and over $5 billion. Recently, the larger, $5 billion+ funds have collectively raised more capital.
Even with increasing personalization in wealth management, it appears the trend of big funds getting even bigger won’t change soon. As the largest alternative asset managers concentrate on building and delivering evergreen fund structures to the wealth channel, we can only expect the gap to widen.
The middle-sized funds face the greatest uncertainty. The largest players wield resources, scale, capital, and brand presence, enabling them to craft, market, and distribute evergreen funds and secure their place on private bank menus. They have the personnel to distribute these funds to the wealth channel, which is crucial at least until model portfolios gain prominence.
Just over a year ago, Dave Layton, Partners Group’s CEO, remarked that "private markets have entered a new phase of maturation and consolidation." Highlighting pressures in fundraising, rising interest rates, regulatory costs, M&A focus, and the move toward wealth channels, Layton predicted only scaled platforms will successfully navigate this landscape, even suggesting the number of vital next-generation platforms could shrink dramatically, possibly to as few as 100, over the next decade.
Layton stressed, “There is a real bifurcation between those managers who can raise money and those who cannot.” In larger firms, this awareness fuels acquisitions aimed at capability growth and footprint expansion. Smaller firms face tough battles in scaling independently and often recognize the benefits of collaborating with larger platforms for brand reach and resources.
Consequently, many of the industry’s biggest firms have made acquisitions, using public currency to acquire managers and broaden their reach in sector, strategy, geography, and LP base. According to a 2023 Bain & Company report, around half of all M&As up to 2023 focused on expanding asset classes, with credit being the most sought-after capability for acquirers to add.
While acquisition activity in alternative asset management has skyrocketed, it’s confined to a small group of firms. As Bain’s report indicates, acquirers are often publicly traded alternatives managers. Public firms find acquisitions easier to finance thanks to strong balance sheets and the ability to tap into stock currency or access debt when needed.
Creating a brand on a global scale is achievable for the large players, which isn’t the case for mid-sized managers. Brand power is crucial for anyone aiming to work with the wealth channel. This differentiator further deepens the divide between the top echelons and the struggling players in private markets.
For Dave Layton and Partners Group, "natural selection" is par for the course in asset management, where size truly matters. For any aspiring alternative asset manager, if growing the firm is the goal, expanding AUM is almost always the strategic choice.
Ultimately, when considering growth from a business angle (not necessarily from the LP perspective), increased AUM boosts fee-related earnings, generating more revenue for management. Larger AUM also allows firms to commit more capital to larger opportunities, potentially offering better risk/reward dynamics.
Growing firms find it easier to attract and hire top-tier talent. In the competitive realm of alternative asset management, this shouldn’t be overlooked. Layton’s consolidation prediction may hold, yet there are plenty of middle-ground players with $1-50 billion AUM. So, how do they reposition themselves tactically?
Strategic Partnerships
Firms eager to maintain some independence can partner with larger platforms, like Churchill with Nuveen or Pemberton with Legal & General. While these firms sacrificed ownership, they gained tremendous advantages, including initial capital and brand association, resulting in their substantial growth.
Niche Riches
Smaller firms can excel by homing in on a niche that, while currently small, may see consolidation as larger funds prefer acquiring capabilities over building them. Sports investment presents such an opportunity, with institutional investor interest expanding rapidly. Though frontrunners and larger firms are building reputations here, the opportunity is sizeable enough for additional funds.
Private equity and credit secondaries, GP stakes, infrastructure, and venture capital/growth equity are other areas that large-scale firms might explore to expand beyond their core focuses.
Define Your Customer
Crucially, mid-sized managers must identify their target LP profile and focus on excelling in a field where scale doesn’t necessarily equate to performance. There are still numerous niche areas where smaller size might actually enhance returns. Remember, performance fosters popularity; LPs pursue strong returns. If a firm can maintain good results as fund size grows, they may have found their edge.
AGM tracks leading publicly traded alternative asset managers with an Index, offering insights into private market perceptions based on investments and capital allocations into alternative assets.
For the latest in-depth discussions and news on private markets, I invite you to dive into our podcasts and articles, where industry leaders share insights. Thank you for reading! If you find this newsletter helpful, please share it and keep the conversation about private markets alive.
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A big thank you to Michael Rutter and Nick Owens for their invaluable contributions.
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