Private markets research house Preqin published an in-house interview with Chief Executive Officer Christoph Knaack last month, which shed some interesting light on expectations for the asset classes – with the caveat that this is very much preaching to the converted.
This came along with a well-timed prediction by Preqin that global alternative assets under management would grow 70.7% from US$13.7 trillion at the end of 2021 to $23.3 trillion by end-2027.
I don’t see any reason to argue with that prediction, but Knaack’s interpretation of it does warrant some consideration.
He does acknowledge that conditions for private funds are currently “challenging” – and not just simply due to macro externals. He cites “the highest proportion of funds in the market for years” as one major challenge, as well as asset valuations coupled with rising interest rates that private equity investors cite as “key challenges for return generation” in the year ahead.
Partly as a result, Knaack sees the balance of power in the general partner (GP) and limited partner (LP) relationship shifting back to LPs when it comes to negotiating fees and terms. He also sees a trend towards consolidation, with fewer large players raising larger funds, and a flight to quality among LPs seeking safety with familiar brands.
All the same, he sees the growth momentum in private funds continuing, driven partly by “strong risk-adjusted and absolute returns” and by trends such as “the democratisation of private markets” as more private wealth clients come into the investor base.
According to Knaack, “the wealth management channel represents a multi-trillion-dollar opportunity, with less than 5% allocated to alternative investments today”.
There isn’t any suggestion here that the US Securities and Exchange Commission’s recent state of law-making for private funds is going to slow the private funds industry’s development at all. Nor is it likely to.
As for the increasing presence of ultra-high-net-worth investors in private assets, to some extent this is welcome, because they are at least able to handle the ups and downs of what is still a higher risk set of asset classes with longer-dated returns. They can also handle the various fees and expenses attached, and can afford to lose money when those risky bets don’t pay off.
And fewer losers are likely to suffer in those scenarios than when pension funds see less-than-expected private equity returns. So it’s just as well that the private wealth segment is growing so buoyantly. That $23.3 trillion has got to come from somewhere.
