For its latest report – Supermodel: the great evolution in asset management – Carne surveyed 200 executives from asset managers representing a combined USD15.98 trillion in assets under management (AUM) on the commercial pressures that their businesses are set to face in the coming two years.

When asked to identify the strategies being prioritised for revenue growth over this period, 40 per cent identified developing new funds in core private asset classes as a high priority for their firm.

However, broadening access to private markets is proving both an opportunity and a challenge, with 37 per cent of managers ranking the development of new funds in core private asset classes as one of the most difficult strategies to support.

Speed to market suffering in race against time

With investable assets being significantly reallocated to private markets, managers who can bring competitive products to market quickly will be best equipped to seize this growth opportunity.

However, entering unfamiliar regulatory territory with debut products is a complex undertaking for the in-house management functions tasked with delivering on this agenda. Over half (55 per cent) of asset managers cite the development of funds in new asset classes as their most challenging growth strategy.

Legal and regulatory administration as well as due diligence of distribution partners are rated as the least efficient parts of the process, placing the greatest strain on already stretched in-house resources.

As a result of this complexity, speed to market is slowing, with 63 per cent of managers stating that a typical fund launch now takes 10 months or longer. With private markets AUM projected to reach more than USD15 trillion by 2025 and more than USD18 trillion by 2027, speed to launch will be critical for asset managers in order to capitalise on the allocations shift currently underway across the industry.

Industry turning to third-party specialists to support expansion into new product areas

In order to solve this cost/growth conundrum, asset managers are increasingly looking to outsource management company (ManCo) responsibilities to external specialists – unlocking access to dedicated expertise that can expedite the regulatory approval process, execute on new reporting requirements, and enable greater speed to market.

Taking the Luxembourg market as an example – a key domicile for alternative funds – PwC’s 2024 Barometer shows that the proportion of AUM managed by third-party ManCos relative to the market’s total AUM has continuously increased in recent years, growing from 6 per cent in 2018 to 18 per cent in 2023, the firm writes. This has coincided with significant growth in alternative investments as a proportion of Luxembourg ManCo AUM, with non-regulated AUM achieving a compound annual growth rate of 57 per cent since 2018 – vastly outpacing regulated AUM at just 8 per cent.

According to Carne’s research, this trend towards outsourcing is set to continue across the industry. Among those surveyed, more than half (51 per cent) of asset managers with proprietary in-house management companies plan to outsource more specific functions to a third-party ManCo over the next two years – with regulatory reporting (41 per cent), sustainable investment support functions (39 per cent) and distribution (37 per cent) among the most commonly cited areas for outsourcing.

Almost a third (29 per cent) of firms expect to outsource ManCo responsibilities specifically to support new products, while 19 per cent expect to fully outsource ManCo functions to a third-party provider over the next two years.

Commenting on the findings, John Donohoe, CEO and Founder at Carne Group, says: “The widespread reallocation of assets to private markets is creating a pivotal land grab opportunity for asset managers who can service this demand with competitive products brought to market quickly. Private market funds have the potential to offer managers much higher revenue than the margin-constrained, fee-bound products in the actively managed equity and fixed income universe, making this an opportunity that many managers simply can’t afford to miss in a cost-constrained environment.

“However, the complexity of launching new private markets funds means that, the faster an asset manager wishes to grow, the greater the operational challenges that arise. Our research, as well as our experience of evolving client needs and challenges, suggests that the growth in alternatives is intrinsically linked to the growing appetite for outsourced solutions, which are guiding asset managers through complex regulatory processes and helping them to expedite these products’ route to market.”

Through the joint venture, AlTi and AllianzGI will launch a private markets investment programme for UHNW clients that will benefit from AllianzGI’s exceptional network and scale. By investing alongside Allianz, the program will provide unprecedented access to leading third-party managers with outstanding track records, significant scale benefits, low minimum ticket sizes, and expanded investment opportunities, including secondaries and co-investments.

The program will initially focus on the approximately USD1.5 trillion global private debt market, leveraging AllianzGI’s track record in private markets for over 25 years.

Michael Tiedemann, CEO of AlTi Tiedemann Global, says: “Our AlTi-Allianz Private Debt Program sets a new benchmark in the UHNW wealth management industry. We are delighted to offer our clients unique access to Allianz’s world-class network of third-party managers at attractive terms and with additional access to co-investments and secondaries. We believe the combined resources of our platforms will provide current and prospective clients with an offering that is unmatched in the alternatives investment space.”

Tobias Pross, CEO of Allianz Global Investors, says: “For ultra-high-net-worth individuals and select institutional investors, diversification beyond the public financial markets can help to preserve and grow capital. Private debt’s diversification benefits, coupled with its attractive risk-adjusted returns, make it a compelling component to investors’ portfolios. Through our strategic partnership, we are able to bring some of the best investment opportunities in private markets to the most discerning and dynamic owners of capital in the world. We believe this is only the beginning, as we seek to expand our joint offerings in private markets in the months and years to come.”

Nazim Cetin, CEO of Allianz X, says: “This partnership is a powerful demonstration of Allianz X’s prowess as a strategic investor and business builder – for its partner companies and the Allianz Group. The formation of our JV with AlTi just months after our initial investment is a first building block of what we can achieve together in the expanding wealth management sector. We’re poised to revolutionize access to the private markets, initially through private debt, and we are confident that investing alongside Allianz will unlock new opportunities for AlTi, Allianz, and the broader UHNW market segment.”

The firms write that Future Growth Capital (FGC) will, subject to all regulatory approvals, support the objectives of the UK’s Mansion House Compact, unlocking investment opportunities in private markets for millions of new pension savers to benefit from the diversification and investment return opportunities that unlisted assets can offer.

FGC aims to deploy an initial GBP1bn and GBP10-20 billion over the next 10 years into UK and global private markets. Phoenix Group intends to invest 5 per cent of its relevant savings products on behalf of its policyholders, in line with its Mansion House Compact commitment. This will provide scale at inception, with ongoing fundraising led by both Schroders and Phoenix Group.

The new investment manager will design and manage UK and Global multi-private asset solutions for UK insurance and pension clients to open access to a broader range of innovative companies and investment opportunities for millions of UK pension clients. Initially it will leverage Schroders’ pioneering Long-Term Asset Fund (LTAF) investment platform, providing investment advice to the fourth and fifth LTAFs planned for launch by Schroders’ dedicated private markets business, Schroders Capital, in the UK.

The firms write that a key focus of FGC will be investing on behalf of pension savers to grow the UK’s companies of the future. FGC will provide long-term financing for innovative, growing businesses, helping to create jobs and boost the UK economy. As a major investor in the UK’s private markets, it will help to develop the UK private market ecosystem and to promote the UK as an attractive private market investment destination.

Chancellor of Exchequer Rachel Reeves says: “I welcome today’s multi-billion-pound announcement from Schroders and Phoenix Group, which will ensure that more of people’s pension savings are invested into the UK’s highest growing companies. We want pension fund money to work harder for people and the economy. That’s why our pensions review will explore how we can unlock even more investment in the UK economy while boosting pension pots.”

Peter Harrison, Group Chief Executive Officer, Schroders, says: “The UK’s private companies are an untapped universe of investment opportunity. By stimulating investment into our private markets, our partnership will address the multiple challenges of the looming retirement crisis and boosting UK growth. By connecting long-term savers with our country’s most inventive companies, Future Growth Capital will help more people to fund a secure and comfortable retirement, whilst supporting businesses to grow and thrive right here in the UK. In doing so, we’ll be making the UK an even more attractive place to live, work, retire and invest.”

Andy Briggs, Group Chief Executive Officer, Phoenix Group, says: “For too long, pension savers in the UK have received lower returns than their counterparts in the P7 such as Australia and Canada, partly because the UK allocates much less capital to private market assets than other developed countries. By forming FGC with Schroders, it will help us to deliver our goal of giving UK long-term savers a way to invest in a more diversified portfolio with the potential for higher returns, from a broader range of assets. This facility will also play a significant role in the future design of our flagship defaults. FGC will be a long-term, patient capital investment manager, constructed to ensure that customer protection remains at its core by taking a blended approach to asset allocation.”

Commenting on the announcement, Ashish Patel, a Managing Director in Houlihan Lokey’s Capital Markets Group, says:

“This development is a significant step forward, enabling UK pension funds to provide savers with better access to high-quality private businesses while unlocking much-needed capital to finance UK ‘scale-ups’. Overseas pension funds (including Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board) have long been active participants in supporting UK tech firms on their path to international success, yielding impressive results for their investors. We hope that UK pension fund savers will similarly benefit from the venture.

“Overall, the Mansion House Compact has been well received within the venture capital ecosystem, but its true impact will be determined by the extent of investment in early-stage startups, which are already well-supported by tax-advantaged schemes like SEIS/EIS/VCTs, versus growth-stage scale-ups, where a significant funding gap remains between Europe and the US.”

Phoenix Group and Schroders write that the full benefits of FGC include:

A partner for UK pension savers

Longer lifetimes and low savings rates mean that more than half of UK Defined Contribution (DC) savers are currently not on track to meet the PLSA’s minimum retirement living standard. Private markets offer pension and other long-term savers much-needed diversification and the potential for higher investment returns to help boost their retirement incomes. To benefit UK pension savers and access the returns from private markets, FGC will launch UK and Global LTAFs, offering diversified exposure to a broad range of UK and global private market opportunities. FGC’s solutions will aim to deliver superior returns to pension savers, allowing them to invest efficiently and with confidence.

A partner for UK business

FGC will also align with the aims of the Mansion House Compact, of which Phoenix is a signatory and which Schroders endorses, by connecting the long-term investment needs of pension savers with the long-term financing needs of the UK’s most innovative companies.

There are approximately 35,900 medium sized private companies in the UK, compared to just 1,900 companies listed on the London Stock Exchange. The UK is a centre for technological and industrial innovation, but there is a shortage of home-grown financing to support new, emerging businesses. FGC will invest in the UK’s businesses of the future, providing the long-term financing they need to grow and remain in the UK. FGC will support the goals of the Capital Markets Industry Taskforce (CMIT), of which both Schroders and Phoenix are committed supporters.

Championing the UK

FGC will also promote the UK as an attractive private market investment destination internationally and spotlight the many world-leading private companies that we have. This builds upon the recently announced partnership between Schroders, Phoenix Group and the British Business Bank to support the government’s Long- term Investment for Technology and Science initiative, which aims to stimulate venture and growth investment in the UK’s life science and technology companies.

The MSCI Private Capital Indexes meet these investor needs, the firm says, building upon MSCI’s independence and expertise in driving transparency and introducing robust data and solutions across asset classes.

The Indexes, constructed from a broad universe of private capital funds with over USD11 trillion in capitalisation, leverage MSCI’s transparent methodologies and reputation for rigorously verified data. Encompassing private equity, private credit, private real estate, private infrastructure, and private natural resources, these 130 Indexes complement MSCI’s over 80 existing real asset fund and property indexes providing investors with a comprehensive view of global private markets and the full risk spectrum of private real asset investing. Coupled with MSCI’s suite of equity and fixed-income indexes, the firm writes that these private capital indexes offer a multi-asset perspective for investors across their portfolios.

Institutional investors can leverage these Indexes to meet their unique investment mandates and achieve long-term financial goals, while detailed insights from these Indexes can enable strategic asset allocation for asset owners.

Henry Fernandez, Chairman and CEO of MSCI, says: “Investors need tools that will help them cut through the complexity of private markets and take advantage of new investment opportunities. Our private capital indexes allow investors to gain clarity across their investments through high quality validated data and industry leading index construction.”

The most recent is the ACCESS Pool – a GBP35 billion partnership comprising the Cambridgeshire, East Sussex, Essex, Hampshire, Hertfordshire, Isle of Wight Council, Kent, Norfolk, West Northamptonshire Council, Suffolk and West Sussex County Council pension funds – which is seeking to appoint two private equity allocators.

it is anticipated that the aggregate size of the annual commitments will be worth GBP500 million or more on average each year. 

The ACCESS pool says that considering the potential ultimate scale of the mandate, it is anticipated that total assets across all vintages for both allocators could exceed GBP4-6 billion, based on potential asset growth and increases to individual authorities’ target allocations.

This marks the third phase of the ACCESS Pool’s private markets programme that has seen it steadily add private markets assets into its investable universe, most recently infrastructure and real estate.

The latest tender follows several issued by local authorities in the last six months, starting with the Wales Pension Partnership (WPP) – a collaboration of all eight of the country’s LGPS funds – which is developing a range of private real estate sub-funds.

The request for proposal includes UK and global real estate and local/impact real estate sub-funds. 

This was followed in December last year by three separate tenders for property managers from the West Sussex Pension Fund. The mandates are worth GBP40 million in total.

Also in December, two of the LGPS largest pension pools – the GBP60 billion Border to Coast and the GBP55 billion LGPS Central – announced multi-million-pound global real estate commitments.

The tenders will be music to the ears of incumbent Chancellor of the Exchequer Jeremy Hunt, who used the Autumn Statement to confirm that the government will go ahead with a proposal that the LGPS should aim to invest 10 per cent of its assets in private equity.

The government is keen to channel significant sums from the LGPS pools – which will be worth a projected GBP200 billion by 2040 – towards projects it believes will help realise its net zero and levelling up ambitions, and support UK business.

However, despite the flurry of real asset mandates, a large proportion of the LGPS schemes have expressed misgivings about government interference in their investment strategies. 

Following last year’s consultation on introducing 10 per cent targets to private equity, 84 per cent of LGPS respondents opposed the proposal, with some raising concerns about a potential conflict of fiduciary duty.

The tenders also run counter to comments made by the LGPS Advisory Board which argued that the strong funding levels across many public pension funds meant they were looking to reduce their exposure to risk.

“In any case many funds are now in a position where, due to strong funding levels and the desire of many employers to manage volatility in their future contribution levels, they wish to reduce their exposure to risk. That makes them very reluctant to increase their allocation to riskier asset classes, such as private equity,” the Board said. 

Speaking at the Pensions and Lifetime Savings Association Annual Investment conference, Dan Mikulskis, chief investment officer (CIO) at People’s Partnership a master trust providing workplace defined contribution schemes, says private markets are not accessible until investors reach a certain scale.

“We don’t invest in private markets at all. Is it going to play a part in our strategy in the future as we grow and get to a real scale? Probably. But private markets get put on a pedestal too much, and while there can be good investments, there can be a lot of bad investments as well,” he said.

Mikulskis also questioned the charges associated with private markets investing, arguing that the balance of power lies with fund managers.

“There is often a fundamental unfairness between manager and client in some of the structures that exist in private markets. Change is needed in the industry to get the right results for the members.”

Leandros Kalisperas, CIO at the GBP19 billion West Yorkshire Pension Fund, noted that 80 to 90 per cent of the local authority scheme’s costs comes from 15 to 20 per cent of the portfolio, which is allocated to private markets.

 “That is a meaningful asymmetry. It does need to be understood as to whether that offers value for money to members,” Kalisperas said.

Padmesh Shukla, CIO at the GBP14.5 billion Transport for London Pension Scheme, said the fund’s multi-billion-pound commitment to private markets was “governance heavy” and warned that unless investors were well resourced, investing in the sector may not pay off.

Shukla said: “These are expensive, governance heavy asset classes. The range of [performance] outcomes from investing in private markets can be quite large. If you’re on the wrong end of the spectrum it will feel worse than investing in the public markets. Having the ability to do private markets properly is the key.”

The warnings follow a range of reforms from the UK government designed to make it easier for investors to allocate to private markets. 

Chancellor Jeremy Hunt’s Mansion House reforms includes an agreement between major workplace pension schemes to increase investments in private equity, exploring handing defined benefit (DB) scheme sponsors greater flexibility to access surpluses and proposals to encourage consolidation of small pension pots.