Traditional asset managers that are publicly traded have long offered investors the option of owning a piece of a steady — read boring — business. But Casey Quirk, the asset management strategy consultant owned by Deloitte, is forecasting that the much sexier business of managing private market assets will soon dominate, coming to represent about one-third of the industry’s revenue by 2024.
Recent tie-ups between managers, including Macquarie’s planned purchase of Waddell & Reed Financial, is speeding up the ascendance of private equity and other alternatives firms and transforming exchange-listed asset managers into a much hotter sector.
“I don’t think this is a cyclical trend. It’s secular,” said Benjamin Phillips, principal and chief strategist at Casey Quirk. “Why? Alternatives firms are valued at nearly twice the multiple of that of traditional managers. That reflects organic growth that is expected in the future and fees. Fee pressure hasn’t manifested in alternatives.” Fees for traditional asset management have been under pressure for years as investors have shifted much of their money to index funds.
BlackRock is the world’s largest publicly traded asset manager measured by market capitalization, according to a list from CL-Media Relations. Number two on the list is Blackstone Group, followed by Brookfield Asset Management, KKR, T. Rowe Price, Partners Group, Apollo Global Management, Amundi, 3i Group, and Ares Management, which comes in at number ten. Seven of the 10 largest players on the list are alternatives firms, according to CL-Media.
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Investors believe that public alternatives firms benefit from lower distribution costs because they’re primarily selling to large institutional investors such as pension funds, said Phillips.
“People say the economics of asset management are dying,” he said. “I say no they’re not. The economics of the asset management we grew up in might be dying.” Phillips explained, for example, that private equity firms have more power than traditional managers or hedge funds to stand firm on fees because investors’ money is locked up in funds for seven to ten years. Private equity firms also have the ability to mitigate investor concerns over fees by offering deals such as lower fee or no-fee co-investments.
Casey Quirk projects that the compound annual growth rate of revenue from private markets strategies will be 7.9 percent through 2024. That will amount to an estimated $43 billion in industry revenue. Revenue from fixed income strategies is expected to grow at a CAGR of 4.4 percent, totaling only $13 billion in industry revenue. Low-fee passive strategies, which make up a growing part of the industry, will grow at a CAGR of 3.9 percent. But the revenue will amount to only $5 billion.
The next big opportunity for private markets firms is retail investors. “The struggle will be to get beyond the institutional world and get to individuals,” Phillips said. Private markets firms will need to develop innovative technology solutions and new financial advice models to reach individuals through defined contribution plans and other third parties, such as financial advisors, he added.