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The number of private market fund managers will shrink to 100 over the next decade as rising interest rates, financing challenges and increased regulatory costs drive a wave of massive consolidation, a leading European private equity firm said.
David Layton, chief executive of Partners Group, which manages $142 billion in assets, said the private equity market has entered a “new phase of maturity and consolidation.” He said in an interview that a significant increase in M&A activity would be driven by managers coping with financing pressures in more difficult economic conditions and turning to wealthy individual clients as a driver of new asset growth.
“Realistically, only large players will be able to withstand the forces reshaping the private markets industry. We may see the current approximately 11,000 industry players shrink to 100, and these platforms will play a significant role over the next decade.” Layton said.
Illiquid private markets strategies held $12 trillion in assets at the end of December, according to consulting firm Preqin. The firm estimates that total private market financing fell 8.5% last year to $1.5 trillion, and net inflows to private equity managers fell 7.9% in 2022 to $677 billion.
Many smaller private equity managers are finding the process of attracting new business increasingly difficult. The top 25 largest competitors account for more than a third of the $506 billion in new allocations of private equity capital so far this year.
“There’s a real divide between managers who can raise capital and managers who can’t. As the industry grows in size, that will accelerate the process of natural selection,” Layton said.
Leading industry executives have been predicting a changing landscape for alternative asset management. Consolidation is already underway, such as CVC’s acquisition this month of a majority stake in Dutch infrastructure investor DIF Capital Partners for about €1 billion in cash and shares.
Bridgepoint announced this month that it would acquire US renewables specialist Energy Capital Partners in a cash and shares deal worth around £835m.
Jon Moulton, founder of UK-based Better Capital, said “massive change” is coming, given the difficulties smaller private equity funds face in getting support.
“Institutional investors are more willing to allocate $1 billion in one-time allocations to large private equity managers than to issue $100 million in successive issuances,” Moulton said.
All private equity investment managers also face the prospect of increased legal and compliance costs due to new U.S. reporting requirements, a burden that will put disproportionate pressure on smaller companies.
Hugh MacArthur, global chairman of Bain & Company’s private equity group, said that historically, private equity integrations have been “essentially impossible to get off the ground” because of integration issues involving culture clashes, executive compensation and performance fees. However, more companies are now looking for new ways to grow their assets.
“Adding asset classes to a larger platform, geographic expansion, new customer channels and strategic distribution are all means to achieve this. The real challenge is to convert M&A into continued organic growth.” MacArthur said.
Layton played down the prospect of Partners embarking on an M&A spree, but expected more deals between traditional asset managers looking to expand their investing capabilities and alternative investment managers needing access to larger distribution networks.
Partners Group expects private market assets to reach $30 trillion, driven by wealthy individual investors increasing allocations to new “evergreen” fund structures that have no finite lifespan.
The Switzerland-based firm also intends to offer more multi-asset class mandates that can be tailored to the needs of institutional clients.
In the era of ultra-low interest rates, many private equity managers obtained debt on very favorable terms. Looming debt refinancing requirements may accelerate the consolidation process.
Partners Group said rising interest rates meant expected returns on private equity investments fell by about 400 basis points. That could leave private equity executives, known as general partners, or general partners, facing tough choices about debt-financed investments.
“Many sellers of private market assets are basing their valuations on yesterday’s valuations, while many buyers are saying ‘it’s a new world’ (for pricing),” Leighton said.
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