Private capital industry soars beyond $7tn

The private capital industry has grown to more than $7tn thanks to demand for higher-returning but pricey and opaque strategies, spurring the likes of Schroders and JPMorgan to launch new divisions and sending others on the prowl for acquisitions. 

Although still dwarfed by the traditional asset management industry — which primarily invests in mainstream, public equity and bond markets — explosive growth in areas such as private equity lifted the size of the overall private capital industry to $7.4tn at the end of 2020, according to Morgan Stanley. The bank expects it to hit $13tn by 2025.

Private capital is now growing as quickly as cheap, index-tracking passive investing, prompting many big asset management groups to expand their operations in the area to counteract the profit pressures on traditional investing avenues. 

Schroders, the UK’s biggest listed investment group, earlier this week announced it would consolidate all of its private capital vehicles into a new entity called Schroders Capital. At an investor event, it also vowed to double the size of those assets to £86bn by the end of 2025, Barclays noted. 

“Platforms are going to be key to what I call the ‘industrialisation’ of private markets,” said Georg Wunderlin, global head of Schroders Capital. “We are maybe 15 years behind public markets, but the industry is maturing in a similar way.”

JPMorgan Asset Management also set up 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 jump-start their work. 

“It is something that we’re evaluating,” Robert Sharps, T Rowe Price’s president and chief investment officer, said at the company’s annual shareholders’ meeting last month. “The trend toward greater allocation to illiquid strategies and private assets among many of our clients is not something that’s lost on us.”

Industry insiders say that the biggest drivers of the appetite for private capital investments are the low interest rate environment and lofty stock market valuations, which have dimmed the outlook for future returns from those asset classes. At the same time, private markets are less volatile as they trade only rarely and valuations can be more subjective, an opacity that actually increases their lustre to many investors. 

For many investment groups, under pressure from the exploding popularity of cheap, passive funds, the appetite is a huge boon, Morgan Stanley analysts noted in a report on Thursday.

“For traditional asset managers, fees will be relatively harder to defend given the commoditisation of the industry and existing margin challenges,” the report noted. “As a result, we expect traditional asset managers to use these levers more to defend existing revenue pools while leaning into alternatives with its fatter fee pool and private markets with its higher structural growth.”

Private equity still accounts for the biggest chunk of the private capital universe, with assets of more than $3tn, but it is growing more slowly than areas such as private credit, funds that circumvent banks and make bespoke loans directly to companies, and infrastructure.

However, the fastest-growing corner is so-called “growth equity”, which typically involves investing in companies that are too big to tap classic venture capital firms, but unwilling to go public or sell completely to private equity. 

Growth equity accounted for 14 per cent of the private capital industry at the end of last year, up from 5 per cent in 2005, according to Morgan Stanley. JPMorgan Asset Management earlier this week said it had poached Christopher Dawe from Goldman Sachs to lead a new growth equity investment arm, as part of its broader push into private capital. 

“Growth equity and private debt are among the fastest-growing asset classes in the alternatives industry, with strong demand from both individual and institutional investors to look beyond public markets,” Brian Carlin, chief executive of the newly-established JPMorgan Private Capital, said in a statement. 

The private capital industry has accumulated almost $2.5tn of “dry powder” — money committed to funds by investors but not yet deployed. This has underscored the ferocious competition for attractive deals, and led some analysts to warn that returns cannot remain as buoyant as they have been historically. 


Twitter: @robinwigg