Private markets to grow rapidly but regulation remains complex

In its latest report, based on research of 201 investors representing $1.93trn in combined assets under management (AUM), investors estimate that the total value of global private market assets will grow by 62 per cent.

According to the study, the democratisation of private markets, as evidenced by increasing allocations from defined contribution (DC) pension schemes and wealth managers, is a significant driver of this growth.

Of those surveyed across the UK and Europe, DC schemes expect their sector’s level of investment into private markets to increase by on average 10 per cent over the next three years. Wealth managers anticipate private market investments to account for around 11 per cent of their sector’s AUM by 2030, up from 5 per cent in 2021. 

Enhanced returns and ESG potential drive appetite for private assets

When considering the reasons for increasing allocations to private markets, the potential to offer greater risk-adjusted returns was a key factor.

Almost half (44 per cent) of wealth managers anticipated a portfolio with a 20 per cent allocation to private markets to deliver greater returns over the long term compared with a traditional 60/40 portfolio. Over a third (37 per cent) of DC schemes shared this expectation.

When considering their long-term allocations to specific alternative asset classes, DC schemes on aggregate expected their largest allocations to go to real estate (33 per cent), infrastructure (25 per cent) and private debt (22 per cent). 

For wealth managers, the equivalent top three were real estate (21 per cent), venture capital (17 per cent) and infrastructure (15 per cent), followed closely by private debt (12 per cent).

Sustainability is another key driver, with 98 per cent of DC schemes and 96 per cent of wealth managers agreeing that private markets enabled investors to make more of an ESG impact than investing in public markets.

Almost all (94 per cent) of the UK managers surveyed are currently participating in European markets, and the remainder which are not, intend to do so within the next 12 to 24 months.

Regulatory challenges

However, there are a number of hurdles investment managers on both sides of the Atlantic need to overcome to fully seize the $8trn private markets opportunity, with both UK and US investment managers raising particular concern around European regulatory complexity.

Regulation was cited as a key obstacle to successful European fundraising by US managers, second only to concerns around corporate governance.

More than three-quarters (78 per cent) agreed that EU regulations around private assets were more complex than their US equivalents, while 68 per cent believed that navigating these regulations would become even harder in the years ahead.

Among UK managers, the regulatory environment was identified as the greatest challenge to successful fundraising and fund launches.

Its complexity also translated into a commercial challenge, with the majority (68 per cent) expecting to spend between 25 per cent and 50 per cent more over the next two years on resources dedicated to managing regulatory compliance.

While strong sustainability credentials are a key driver of growth in alternative asset classes, sustainability also preseneds a set of independent challenges for investment managers, with 77 per cent of all managers surveyed specifically identifying ESG regulation as a 'deterrent' to participating in European markets.

John Donohoe, chief executive at Carne Group, said: “Amid increasing demand from wealth managers and DC pension schemes to drive greater, more sustainable returns for their clients, the democratisation of private markets is a rapidly growing and attractive opportunity for asset managers globally.

“While the flow of retail and pension capital into previously inaccessible markets must of course be accompanied by appropriate safeguards to protect investors and their assets, our research underlines that the current regulatory environment in Europe is proving difficult for many asset managers to navigate and may in fact become a barrier to these products entering the market. 

Managing liquidity, ensuring appropriate pricing, ESG scrutiny and novel fund structures present challenges for all investment managers looking to scale private market propositions in Europe, the study found.

Outsourcing

Turning to solutions for addressing these challenges, the investment managers surveyed expressed a strong inclination towards external support when it came to launching and raising funds in European markets.

The majority (87 per cent) expect their use of outsourcing to increase over the next five years, with 48 per cent of UK managers and 24 per cent of US managers citing reducing regulatory risk as a motivation for doing so.

Des Fullam, chief regulatory and solutions officer at Carne Group, added: “As the market for illiquids grows and matures, we also expect outsourcing to play a critical role in facilitating effective distribution and speed to market, so that investment managers can capitalise on the significant private market opportunity presented across the continent.

“The fragmented nature of the European market can present challenges to internal sales teams as they look to scale, market and distribute funds. Increasingly, internal sales teams are turning to the support of third-party specialists to help them launch across their European networks efficiently and effectively.

"Pre-marketing, domiciling and distribution network support are just some of the services third-party management companies can offer in enabling investment managers to launch and scale their funds in Europe with greater speed and confidence.”