Asset managers should look to private markets as a crucial source of future revenue growth, according to research from Morgan Stanley and management consultant Oliver Wyman.
Total asset management revenues will grow at just a 1 percent compound annual growth rate over the next five years, the firms found in a paper titled Searching for Growth in an Age of Disruption. The revenue pool of core active management in developed markets is set to shrink by over a third during this time and will no longer be the largest contributor to industry revenues.
Private markets, emerging markets clients and asset management solutions were identified as three key drivers of growth, growing to 53 percent of the fee pool by 2023, compared with just 38 percent at present. Opening access to private markets through new and more efficient delivery models has the potential to drive an additional $23 billion in revenue.
“If the industry cannot redefine its value proposition into something that investors are willing to pay for, revenue growth prospects look weak, especially when the [quantitative easing]-driven cycle eventually comes to an end,” the report noted. “Asset managers would be forced into a tight spiral of cost and capacity restructuring to maintain earnings.”
Morgan Stanley expects a growing proportion of AUM inflow to come from historically under-allocated investors, such as high-net-worth individuals, defined contribution pensions and insurers. These segments are typically less familiar with private markets and can have structural constraints that can prevent them from investing in such asset classes, including regulations and capital treatment considerations.
Some asset manager executives – representing around $15 trillion of AUM – voiced concerns in meetings with the report’s authors about educating advisors and HNW clients about the iliquidity of private markets.
Private markets products would also require a smaller minimum entry to attract retail investors, and capturing this segment would require an evolution in distribution models, operating platforms and product design, the report noted. Asset managers would need to find alternatives to traditional LP capital deployment arrangements.
Public market managers have had mixed success expanding into private markets, with private debt and real asset capabilities proving easier to integrate than private equity, albeit at a lower scale for most, according to the report.
Asset managers can enter private markets by acquiring more specialised or smaller players. M&A between private markets firms accounted for 35 percent of asset manager acquisitions in 2018, up from roughly 25 percent three years prior. Private market manager valuations remain relatively high compared with overall asset manager prices, which have declined.
“As an alternative to acquisition, asset managers should also carefully consider the product capabilities that they need in order to serve a broader segment base,” the report added.
Funds that have served “established” institutional LPs in private markets may not be used to working with the same portfolio risk controls or portfolio structuring capabilities that DC pension or insurance segment investors require, the report noted. An organic build-out may be a better option.
A number of private equity firms have already tapped the growing retail and HNW segment. Blackstone’s Jonathan Gray identified retail as one of the firm’s top priorities for future growth last year and its private wealth unit had more than $60 billion of assets under management as of November. Partners Group’s €780 million London-listed Princess Private Equity trust, which makes fund commitments and direct investments, is also open to HNWs.