After another tough year in fundraising, private asset managers are putting their weight behind other lucrative options. First, the bad news: The amount of money raised from investors over the past 12 months through the end of the third quarter was down by 3.4 percent from the previous year., according to PitchBook.
But all is not lost. One sign of the times is the continued boom in secondaries, which allow managers to create a new fund to hold onto portfolio companies that they haven’t been able to cash out of in the moribund IPO and M&A markets of 2024. As a result, secondaries are on fire. PitchBook says asset managers have raised almost $100 billion for these secondaries — or 31 percent more than they did in the prior 12 months through the end of the third quarter. While 2023 already came in at a near-record level for secondaries, this year is looking “quite likely to hit an all-time high-water mark,” said Hilary Wiek, senior strategist at PitchBook.
But with many institutions unable or unwilling to pony up more cash for new investments, the market is also being forced to change. The “playbook is now getting rewritten,” according to PitchBook analysts.
“The tailwind of large institutions allocating more and more capital to private markets has become a gentle breeze,” PitchBook analyst Zane Carmean and colleagues explained. “Many of these LPs have come up against their exposure limits for the asset class, resulting in a pullback in fund commitments.”
The new strategy includes evergreen funds, whose structure would make it easier for a bigger cohort of individuals to invest in private assets. (Evergreen funds, which have no fixed-end date and typically have lower investment minimums, provide more flexibility than traditional funds because investors' money is not locked up, allowing them to periodically redeem units, according to Hamilton Lane.)
Technology has made it easier to offer funds that don't have a defined life, but it’s the “relatively untapped potential of the private wealth channel” that “has provided the fuel for this structural shift to take off,” according to the PitchBook analysts.
Private markets are already outpacing the growth in public markets, but only institutional investors, the ultra-wealthy, or members of privileged networks can invest in those funds. That’s because such funds are exempt from the Investment Act of 1940, which mandates certain investor protections that are enforced by the Securities and Exchange Commission. Only sophisticated investors — meaning those that can meet the high investment minimums required — are allowed to invest in assets without those protections.
By 2033, PitchBook expects qualified individuals will invest another $7 trillion in private markets. The research firm says that amount represents more than half the $12.6 trillion in fundraising activity in drawdown funds between 2003 and 2023. “Most evergreen fund offerings launched today are targeted at these cohorts.” the firm said.
If only 5 percent of total global wealth of $450 trillion went into private assets, it could provide a bump of $20 trillion, according to PitchBook. “Finding ways to tap into that capital is now top of mind for many alternative asset managers, with many evolving their investor base by adopting evergreen fund structures to do just that,” the PitchBook analysts explained.
The ultimate prize for private asset managers may be to tap 401(k) plans, which hold more than $25 trillion in assets. “Asset managers are highly motivated to find a model that will work for this source of capital where assets are increasing with employee and employer contributions every paycheck,” according to PitchBook.
In its October earnings call, for example, KKR executives mentioned the opportunity of managing capital for such funds, saying it would make sense for them to become a part of popular target date funds.
Tapping into defined contribution plans now looks more likely. The Biden administration opposed allowing 401(k) plans to invest in private markets believing such a move would endanger retirees. However, William Birdthistle, the SEC’s outgoing director of the division of investment management, said in a Dec. 3 New York Times opinion piece that he believes a Trump administration will be lobbied by the industry—which supported Trump’s presidency—to allow it.
Birdthistle argued against the change, saying that “private funds, by operating largely outside of securities regulations, engage in riskier investing behavior and are not transparent about their activities. Should anything go amiss with those investments, the losses would fall upon American nest eggs.”
“Then it would be millions of ordinary Americans, not just wealthy fund managers, seeking government support for poorly performing private funds,” he concluded.
