The private equity industry has reached over $ 7 billion on demand for higher yielding but expensive and opaque strategies, prompting Schroders and JPMorgan to launch new divisions and send others to seek acquisitions. .
Although still eclipsed by the traditional asset management industry – which invests primarily in consumer, public equity and bond markets – the explosive growth in areas such as private equity has increased the size of the entire private capital sector to $ 7.4 billion at the end of 2020, according to Morgan Stanley. The bank expects it to reach $ 13 billion by 2025.
Private capital is now growing as fast as cheap passive index investments, prompting many large asset management groups to expand their operations in the region to counter the pressures on earnings from traditional investment channels.
Schroders, the UK’s largest listed investment group, announced earlier this week that it would consolidate all of its private equity vehicles into a new entity called Schroders Capital. At an investor event, he also pledged to double the size of those assets to £ 86 billion by the end of 2025, Barclays noted.
“Platforms are going to be the key to what I call the ‘industrialization’ of private markets,” said Georg Wunderlin, Global Head of Schroders Capital. “We may be 15 years behind in government procurement, but the industry is maturing in the same way.”
JPMorgan Asset Management also created a new division this week named JPMorgan Private Capital to house its operations in this area, while other investment groups have said they are looking for acquisitions to start their work.
“This is something that we are evaluating,” said Robert Sharps, chairman and chief investment officer of T Rowe Price, at the company’s annual meeting of shareholders last month. “The trend towards a greater allocation to illiquid strategies and private assets among many of our clients is not something that escapes us. “
Industry insiders say the main drivers of the appetite for private equity investment are the low interest rate environment and high stock valuations, which have clouded the prospects for future returns for these classes of investors. active. At the same time, private markets are less volatile as they rarely trade and valuations can be more subjective, an opacity that actually increases their luster for many investors.
For many investment groups, under the pressure of the growing popularity of cheap passive funds, appetite is a huge boon, Morgan Stanley analysts noted in a report released Thursday.
“For traditional asset managers, fees will be relatively more difficult to defend given the commoditization of the industry and existing margin challenges,” the report notes. “As a result, we expect traditional asset managers to use these levers more to defend existing income pools while looking at alternatives with its larger commission pool and private markets with its more structural growth. high. “
Private equity still makes up the largest part of the private capital universe, with assets exceeding $ 3 billion, but it grows more slowly than areas such as private credit, funds that bypass banks and provide tailor-made loans directly to businesses and infrastructure.
However, the fastest growing industry is what is known as ‘growth equity’, which typically involves investing in companies that are too large to operate traditional venture capital firms, but which do not wish to go public or sell completely to private equity.
Growth equity accounted for 14 percent of the private capital industry at the end of last year, up from 5 percent in 2005, according to Morgan Stanley. Earlier this week, JPMorgan Asset Management said it had recruited Christopher Dawe of Goldman Sachs to lead a new branch of growth equity investing, as part of its broader push into private capital.
“Growth equity and private debt are among the fastest growing asset classes in the alternatives sector, with strong demand from individual and institutional investors to look beyond public markets,” said Brian Carlin, managing director of the new company JPMorgan Private Capital, said in a report.
The private capital industry has amassed nearly $ 2.5 billion in “dry powder” – money committed in funds by investors but not yet deployed. This has underlined the fierce competition for attractive deals and has led some analysts to warn that yields cannot remain as strong as they have been in the past.