As asset managers look to capitalise on the private markets revolution, the development of new funds in core private asset classes is among their highest strategic priorities for revenue growth over the next two years. However, it is also proving one of the most operationally challenging strategies to implement, according to new research from Carne Group.
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.”
