Assets under management (AUM) in the private capital industry stand at USD16.8 trillion as of December 2023 and are forecast to reach USD29.2 trillion by 2029, according to Preqin’s long-term industry forecasts.

This represents a forecast annualised growth rate of 9.7 per cent from 2023 to 2029, which while lower than the 10.5 per cent growth between 2017 to 2023, is still significant.

The spoils of investor interest in private markets are obvious for those firms offering private equity, infrastructure, private debt, hedge funds and more. But what of their service providers?

According to Valerie Kor, author of Preqin’s Service Providers in Alternatives 2024 report, service providers in the alternative assets industry are well-positioned for further growth.

Preqin’s research reveals that as the alternative sector matures, “adaptability and innovation are key traits that will help service providers get ahead”.

Supporting alternatives managers with disclosure and reporting requirements – an element that is becoming ever more onerous for firms as the adhere to demands for more transparency is key.

Kor notes that while the US Securities and Exchange Commission (SEC)’s Private Fund Adviser Rules were overturned in June 2024, “the fact that they were initially broadly welcomed by institutional LPs is a clear indication of what investors and authorities want”.

This includes an annual audit and quarterly statements, among other requirements.

Private markets are also subject to scrutiny from responsible investors, meaning managers must be able to provide adequate ESG reporting, both to avoid accusations of greenwashing and to stay on the right side of ever more stringent disclosure demands, many of which diverge across regions.

Further, in an environment where fundraising remains a challenge, GPs are diversifying into new asset classes or strategies.

Kor says this means they require back-office functions that can handle multiple strategies.

“For example, as valuations fall, private equity managers may want to expand to strategies less susceptible to rising interest rates, such as private debt. However, they may not want to establish too many service provider relationships. This means that service providers that can offer data consolidation and automated workflows through the latest tech-enabled platform will become more appealing.”

Preqin also notes that as the number of fund managers increases every year, there are more new business opportunities for service providers in the alternatives sector.

“At the same time, with valuations still being compressed, managers will be able to strike deals more affordably, which will likely lead to more opportunities for transactional law firms as deal activity improves,” Kor says.

However, with so much shifting in the alternatives space, there are also dangers for service providers.

Preqin finds that fund managers are looking to consolidate the number of third-parties with which they work, while others are seeking to switch to new providers that offer a wider range of services at a better price.

Nicholas Donato, senior vice president service providers at Preqin, says service providers need to be proactive in the fight for market share.

“GPs told us that they value regularly hearing from service providers about their latest technology, client wins, or thought leadership. And even if a firm is not ready to make the switch now, it’s those service providers that prove their worth with a steady drip of market insights that earn a CFO’s attention once they are. It’s unsurprising then that law firms, auditors, fund administrators, and other service providers are significantly ramping up their marketing and business development efforts to earn that call,” Donato says.

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The firms writes that this alliance aims to drive growth and enhance client coverage and capabilities across Greater China (Hong Kong, mainland China, Taiwan and Macau). Effective from 1 August 2024, the alliance includes significant new investment in an expanded distribution platform and new strategic alliance serving investors across the region.

This collaboration leverages GAM’s near 40-year commitment to the region, Swiss heritage and active investing approach with SHK & Co’s deep understanding of the Asian market, strong local presence, and extensive expertise and network. The firms write that together, both companies share a vision and entrepreneurial mindset to drive new business growth, private wealth solutions and active investing opportunities for a broad range of clients. 

As part of this strategic alliance, Sun Hung Kai Capital Partners Ltd, the licensed subsidiary of SHK & Co will drive the distribution and servicing of GAM’s funds across Greater China. To ensure a seamless transition, SHK & Co will utilise GAM’s operational processes, systems, and local Hong Kong talent in the business. 

The firms write that this ensures that excellence in relationship management and service is maintained. GAM remains steadfast in its commitment to Greater China, ensuring continued service and support through this alliance with SHK & Co. 

This new alliance will also build on GAM’s existing product offering of High Conviction Equity, Specialist Fixed Income, Multi-Asset, Sustainable, and a growing Alternative Investment Solutions capability. These products will be available to wholesale, family offices, and institutional channels. GAM and SHK & Co will also collaborate closely to co-develop innovative, alternative, and portfolio-diversifying product solutions for clients both locally and internationally.

Elmar Zumbuehl, Group CEO at GAM, says: “We are delighted to partner with SHK & Co, a market leading firm established in 1969 known for its local market presence, alternative investing expertise and wealth management solutions. This alliance reinforces our commitment to the region and enhances our ability to serve our clients with distinctive and award-winning investment solutions.”

Tony Edwards, Deputy CEO of SHK & Co, says: “We are excited to team up with GAM, a renowned global asset manager with a long-standing history of excellence. This strategic alliance combines our complementary strengths and resources, significantly improving our client service and investment solution capabilities. Together, we are well-positioned to provide exceptional offerings that cater to the evolving needs of our clients in the region. Also, we look forward to deepening and exploring more business collaborations with GAM in the years to come, particularly in alternative investment solutions.”

LMT receives real-time transactional feeds and proactively notifies asset managers in case their custom thresholds have been exceeded. LMT supports liquidity management for fund structures with liquid and illiquid assets and can be adjusted and customised to various fund cycles and cut off times.

Accessed through BBH’s client portal Infuse TA, BBH writes that asset managers can now simulate within LMT and manage their liquidity decisions online. Trades can be accepted as instructed or adjusted on an individual basis or at fund level, with automatic STP cancellations and new STP instructions to support the newly accepted cash flow.

LMT not only provides online projections for the fund’s liquidity needs, but it also provides asset managers with a tool to use to fulfill the growing requirements from regulators around liquidity transparency, BBH says.

The latest Financial Stability Board recommendations FSB Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds, 20 December 2023, ELTIF 2.0 regulation Regulation (EU) 2023/606 of The European Parliament and of The Council of 15 March 2023, and European Securities and Markets Authority draft regulatory technical standards ESMA Draft regulatory technical standards under the revised ELTIF Regulation, 19 December 2023 call for well-established and documented processes using defined and tested liquidity management tools and procedures. Furthermore, the International Organization of Securities Commissions OR01/24 Update to IOSCO 2023-24 Work Programme – March 2024 – March 2025 Workplan has prioritised LMTs as a 2024 focus area and the Central Bank of Ireland announced a thematic review and questionnaire for 2024 Irish Funds Weekly Update – Friday 12 April 2024.

“General spikes of market volatility, as well as risk of higher market volatility due to geopolitical tensions and world events such as COVID-19, have highlighted the importance of automation in liquidity management for risk mitigation and to preserve financial stability,” says Manuel Dienhart, Global Head of Transfer Agency at BBH. “LMT will offer managers a digital solution to manage their funds’ liquidity. It takes what was once a manual and risky offline process, and turns it into straight through automation, helping managers meet regulators’ expectations.”

Further driving the demand for an automated liquidity management tool is the growing interest among managers in ELTIF 2.0, LTAF and evergreen funds, which are open-ended structures that offer high net worth and retail investors exposure to private market asset classes that have traditionally been harder to access. According to BBH’s 2024 Fund Distribution Outlook survey, 50 per cent of asset managers plan to go to market with ELTIFs and LTAFs in the next three years.

“Semi-liquid, open-ended structures put liquidity management into finer focus, especially through a regulatory lens when offering liquidity within a fund holding largely illiquid assets,” says Lata Vyas, Head of European Alternative Funds Product at BBH. “For asset managers, GPs and Management Companies who oversee these portfolios, establishing an appropriate redemption policy and managing the ongoing liquidity needs of a broad spectrum of investors requires tools to be in place that are visible to regulators.”

BBH’s LMT utilises API technology and is integrated with BBH Infomediary, an open-architecture data integration and messaging engine, and currently available for Transfer Agency clients.

The firm writes that the report, produced on a quarterly basis by Kepler’s in-house research team, uses data from Absolute Hedge to shed light on how the popularity of different strategies is evolving within the allocator community, as well as tracking AUM, fund flows and performance.

Matthew Barrett, Partner and Head of Manager Research at Kepler Partners, says: “Following a somewhat difficult period for the Alternative UCITS universe in recent quarters, green shoots are emerging and the backdrop for hedge fund strategies remains compelling. Though Q1 saw a further contraction in AUM, the pace of outflows has slowed and some strategy cohorts, including Credit, Managed Futures and Volatility Arbitrage, are growing. Q1 performance has also been strong across the industry; the AH Global Index achieved positive performance for its fifth consecutive quarter, with Managed Futures a particular bright spot.

AUM and flows

Overall alternative UCITS industry AUM fell by USD7.5 billion (3 per cent) during Q1 to USD236 billion. In absolute terms, redemptions were largely concentrated, with Multi Asset/Macro funds accounting for -USD3.5 billion (47 per cent) of the drop and Event Driven managers accounting for -USD1.7 billion. Within these strategies, a handful of ‘bellwether’ funds experienced most of these outflows, with several relevant closures.

However, some strategies saw their AUM grow during Q1, including Credit, Managed Futures and Volatility Arbitrage, driven by a combination of positive performance and robust investor demand.

The market backdrop for new launches remains challenging, the firm writes, with relatively subdued launch activity in Q1; only three new funds came to market during the quarter.

Performance

Q1 saw a positive start to the year for Alternative UCITS performance. Buoyed by ongoing economic resilience and strong earnings releases, particularly within the technology sector, risk assets performed well during the first quarter. Absolute return strategies saw strong performance against this backdrop, with the AH Global Index returning 2.9 per cent. This marks the index’s fifth consecutive positive quarter.

Systemic strategies stood out in performance terms with seven of the 10 top performing funds falling into this category. Growth-oriented equity specialists were also well-positioned as they capitalised on the AI-driven rally. The AH Managed Futures Index also experienced its best Q1 performance on record (+7.9 per cent).

On the negative side, ESG exposures were again core drivers of underperformance, while some macro managers incurred losses from wrongfooted positioning (short equities and/or long duration).

Carne Group commissioned research with over 200 alternative asset, equity and fixed income fund managers in 10 countries that collectively manage USD1.6 trillion, and when asked to select the top five asset classes they expect to see the biggest increase in fund raising in 2024, private equity came top, followed by renewable energy, hedge funds, private debt and real estate.

In a separate global study with wealth managers and institutional investors including pension funds, insurers and family offices who collectively have USD1.7 trillion in assets under management, 71 per cent said they expected the organisation they work for to increase their allocation to private equity by 10 per cent or more in 2024. Some 70 per cent said this about their allocation to private debt.

However, a big challenge for alternative fund managers is an expected increase in consolidation in their markets driven by fund raising challenges and increasing regulatory costs. Over the next five years, 84 per cent of fund managers surveyed expect the level of consolidation in the real estate fund management sector to increase, and the corresponding figures for the private equity, private debt and hedge fund sectors are 69 per cent,64 per cent and 68 per cent respectively.

John Donohoe, CEO at Carne Group says: “The appetite for alternative assets classes amongst investors is increasingly rapidly, fuelled by a growing desire from investors to diversify their portfolios and to manage volatility.”

“However, the challenges facing alternative fund managers around growing regulatory complexity makes it more difficult for them to capitalise on increased investor appetite for their funds. This is leading to a significant increase in alternative fund managers outsourcing functions to specialist third parties to help them tackle these issues.”

The firm writes that this latest development sees it onboard an active deal pipeline, as a cornerstone of DWS’s strategic initiative to fast-track the growth of its EUR111 billion Alternatives franchise. 

DWS has a 50-year plus track record in Alternatives including established strength in real estate, infrastructure, liquid real assets and direct lending.

The firm writes that the new Capital Solutions business unit will be part of DWS’s Alternative Credit business and offer sophisticated and flexible solutions in the special situations lending space. 

The unit adds to DWS’s other strategic initiatives in Alternative Credit which include Direct Lending, Leveraged Loans and Structured Credit.

Based in London, Spasov is a senior industry figure with over 20 years of capital solutions experience. He was most recently Founder & Chief Investment Officer at Trimontium Capital, and was previously a Managing Director in the Hedge Fund Solutions Group at Blackstone and a member of its Special Situations Investing Group. Prior to that Spasov was a Principal at Ares Management and Vice President at Fortress Investment Group.

He reports to Dan Robinson, Head of Alternative Credit (EMEA).

Dan Robinson, Head of Alternative Credit (EMEA) at DWS, says: “With the appointment of Vlado we are moving forward at pace with our commitment to grow in Alternative Credit. The Capital Solutions strategy addresses an under-served part of the private credit markets between senior debt and equity. Vlado is highly experienced in providing innovative, flexible solutions in this space with a strong and proven track record and we are very pleased to have attracted him to DWS. As well as leading our Capital Solutions business we expect Vlado to play a leading role in the growth of our Direct Lending business.”

Vlado Spasov, Head of Capital Solutions at DWS adds: “There are significant opportunities for growth within the most sophisticated areas of the private credit markets, especially in the delivery of complexity premia to our investors. I look forward to working with the team at DWS and building a leading capital solutions franchise.”

In the first half of 2023, there was great uncertainty about whether a recession was imminent. However, 84 per cent of institutional investors expected the economy would avoid a full recession, and many (44 per cent) believed the Federal Reserve would succeed in its attempt at a “soft landing.”  

To adjust to an entirely new and unpredictable investment environment, institutional investors (68 per cent) indicated that they would take advantage of higher interest rates and increase their allocations to public fixed-income investments. According to the research, almost three-quarters of institutional investors (70 per cent) expect to increase their allocations to actively managed fixed-income strategies over the next 24 months. “This presents a significant opportunity for asset managers with strong fixed-income capabilities and performance,” says Chris Swansey, senior analyst. 

Moreover, a majority (55 per cent) of institutional investors are responding to rising interest rates by increasing their allocations to alternative investments. Private credit strategies have become particularly attractive alternative investments—nearly half (47 per cent) expect to increase their allocation over the next 24 months. 

In addition to seeking exposure to public fixed-income and alternative investments, institutional investors are prioritising several factors beyond investment performance. Asset managers can position themselves to win institutional mandates by charting a clear succession plan (43 per cent), having a well-established investment team (41 per cent), and demonstrating expertise through thought leadership (43 per cent). 

“With portfolios designed to enhance returns over the long term, institutional investors are prepared to withstand short-term economic shocks,” says Swansey. “This allows them to be opportunistic during times of market volatility and take advantage of lower-than-normal valuations,” says Swansey. “Managers that offer these exposures and highlight factors beyond investment performance will be well poised for mandate wins in this market,” concludes Swansey.

Over the past decade, Asian pension funds have gradually diversified their portfolios overseas and into riskier assets such as equities and alternatives. This trend continues apace, Cerulli writes, as they mature and adopt more sophisticated investment strategies. In addition, the poor macroeconomic environment has put pressure on Asian pension funds, with major funds in markets such as Taiwan and Malaysia impacted by global market losses and contributions that have been unable to keep pace with benefit payouts. 

More importantly, many Asian pensions have urgent needs for yields to meet their liabilities and support rapidly aging populations. For instance, Korea’s National Pension Service (NPS) is projected to run dry in 2055, and local industry observers have called for a more aggressive investment strategy, including overseas diversification, to help extend the scheme’s longevity. 

Against this backdrop, most Asian pension schemes’ alternative investments have grown by double digits between 2018 and 2022. As a proportion of their portfolios, alternative allocations for major pension funds rose between 2020 and 2022. Growth was led by Korean pensions: the NPS’ alternative allocations grew 5.5 percentage points and the Korean Teachers’ Pension Fund’s rose 4.1 percentage points during the two-year period. In 2022, alternatives accounted for 10.1 per cent of total retirement assets in the Asia-ex-Japan region, the highest seen for that asset class in since 2018, Cerulli says. 

The challenges faced by pension funds in alternatives investing are areas where asset managers can step in to provide their expertise, the firm says. Nearly 41 per cent of Asian pensions surveyed by Cerulli cite a “limited understanding” of alternatives, while one-third say they lack in-house expertise when investing in alternatives.  

“While Asian pensions continue to boost their alternatives portfolios, it will likely take many more decades for them to build sufficient in-house expertise in the area. Hence, alternatives remain a greenfield for asset managers,” says Shaun Ng, analyst with Cerulli. “Managers seeking to win alternatives mandates from Asian pension funds should be able to source suitable deals, demonstrate a strong track record in specific alternative asset classes, and share knowledge with their clients.”

Yet the very reason investors are allocating to these markets – the potential for attractive yields and low correlation to movements in interest rates and inflation – could put alternative investment funds (AIFs) under pressure in the coming 12 months.

This is the view of Will Edwards, analyst at S&P Global Ratings, who argues in a report ‘Uneven liquidity and strained valuations are pushing some funds toward debt’, that current economic conditions will create a “host of challenges” for the AIF market.

“Global AIFs will come under pressure in the next year. For private equity and venture capital in particular, valuations are uneven, fundraising is slowing, and liquidity needs are rising for AIFs and their portfolio companies,” Edwards says.

With UK interest rates hitting 5.25 per cent this year from lows of 0.1 per cent in 2021, and the US hiking its rates 11 times since March 2022 as central banks on both sides of the Atlantic struggle to bring inflation under control, AIFs have faced, Edwards says: “An inability to sell investments to return cash to their limited partners and a slowdown in fundraising.”

He adds: “At the same time, inflation and increasing interest rates are squeezing their portfolio companies and prompting them to seek help.”

This help will come in the shape of debt which, Edwards says, AIFs will use to shore up their positions and bolster balance sheets. 

“They can use the financing proceeds to purchase new assets, return capital to limited partners to lock in internal rates of return, and provide support to portfolio companies.”

But the pay-off could be a negative impact on the ratings S&P allocates to such AIFs since long-term leverage weakens their view of funds’ financial positions, while the interest burden tests its assessment of liquidity.

However, Edwards says the rated AIFs covered in his universe “should be able to handle” taking on extra debt since they already have low levels of permanent leverage. 

In addition, uncalled capital in place at the fund level provides some liquidity flexibility, and third, general partners are sitting on record-high levels of uncalled cash that could bolster their funds’ financial flexibility. 

He continues: “Some corners of the industry, like private credit and infrastructure appear to be in good health, with fundraising stable, and asset prices and volumes remaining supportive. All told, most ratings should be able to absorb AIFs’ shift to long-term leverage, even as their foundations are tested.”

Overall, alternatives managers rank direct-to-investor initiatives as less important than others—58 per cent report that reaching non-high-net-worth (HNW) investors directly is not an initiative for their firm, and 27 per cent say the same for reaching HNW investors directly. Currently, retail distribution of alternative investments is focused on sales via financial advisors, and especially those with wealthier clients.

Yet, direct platforms have amassed considerable investor assets and will control an estimated USD21 trillion in 2028, up from approximately USD11 trillion in 2022. “Asset managers with direct platforms have a built-in reach to direct-end investors. The platforms are already trusted by investors and not likely to incur steep customer acquisition costs,” states Daniil Shapiro, director. In addition, such platforms already have the clients—and a vault of information—for providing some exposure to alternative allocations.

A logical next step for such platforms is to leverage their scale with the provision of intermittent liquidity products. Interval funds, for example, are one step beyond the mutual funds that are already available for purchase on such platforms. Cerulli recommends that firms that already provide broad market exposures to direct end-investors evaluate whether or not they can expand access to less than fully liquid alternative investment offerings to existing investors.

“While offering self-directed investors access to alternative investments is a significant lift, the firms that already have such relationships should consider it, carefully evaluating the risks and costs (e.g., incrementally more burdensome subscription processes, helping investors navigate a lack of liquidity) against the benefits, which include their securing more attractive fees and helping their investors,” says Shapiro. “Their competitive advantage in offering such access can make it worthwhile and help individual investors avoid riskier exposures elsewhere,” he concludes.