In volatile markets, private capital has proven king as investors seek refuge from rising inflation in asset classes that offer higher yields than equities while providing desirable portfolio diversification.
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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