Private markets - US$8 trillion growth opportunity
Author:
Mark Stockley: Chief Business Development Officer, Carne Group
Performance Magazine Issue 45 - Article 2
To the point
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Over the last few years, private markets including private equity, private debt, infrastructure, venture capital, and real estate have seen substantial inflows totaling billions of dollars.
According to the Carne Atlas 2024 report, this trend is likely to persist, with the total value of global private market assets potentially reaching US$21.08 trillion by 2030. This would represent an US$8 trillion increase (62%) over today’s estimated US$13.01 trillion.
Several factors are likely to drive this growth, including the transition to a greener economy, a dynamic financial system, and the end of zero-rate borrowing.
As opportunities expand and competition intensifies, asset managers face the challenge of quickly bringing new products to market while meeting stringent regulatory requirements. This pressure is leading more fund managers to seek support from third-party specialists who can help them navigate and comply with complex regulations. This approach allows asset managers to concentrate on their primary goal of driving returns and delivering positive outcomes for clients.
In 2023, foreign investment surged in India, flowing in from a variety of jurisdictions. The year also saw a spate of regulatory developments that underscored India’s unwavering commitment to fostering economic growth, streamlining investment processes, enhancing transparency, and nurturing a favorable environment for foreign investors.
As the global economy continues to intertwine with India’s financial markets, it’s increasingly essential for foreign investors to understand the country’s regulatory framework and keep abreast of its changes.
This article summarizes the different routes available to foreign investors, taking a closer look at the regulations governing foreign portfolio investments (FPIs) and alternative investment funds (AIFs) in India. It also breaks down the Securities and Exchange Board of India’s (SEBI) rules and compliance requirements for these avenues.
West side story
- US and UK fund managers – with whom Carne Group conducted its research – tell similar but subtly different stories. The research methodology included surveys from 201 investors (US and UK private market fund managers, UK and European wealth managers and DC pension schemes) representing US$1.93 trillion in combined assets under management (AUM).
- On the western edge of the Atlantic, US managers expect huge growth. Over a quarter (26%) expect the market to almost double, reaching between US$22 trillion and US$24 trillion. This growth is driven by the increasing investor demand for attractive risk-adjusted returns and portfolio diversification.
- At the same time, the rising interest for private markets has coincided with more difficult capital-raising conditions. Geopolitical tensions, equity market volatility, high inflation, and rising interest rates all limit opportunities. As a result, US managers have expanded their focus to global private markets.
- Nearly nine out of ten (88%) US managers surveyed are raising capital in Europe. Of the 12% who are not, half plan to do so, with their varying timeframes. About 17% intend to raise capital in Europe within 12 to 24 months, another 17% plan to do so in three years or more.
- Other key factors driving North American fund managers to raise capital in Europe include portfolio diversification and the overall attractiveness of private markets.
Asset allocation
- US managers expect the level of fund raising to increase across all private asset classes over the next two years compared to the previous two years.
- For example, almost half of managers believe real estate fund raising will grow by up to 10%, while private equity and infrastructure are projected to see increases of between 10% and 20%.
- Additionally, just over 40% foresee venture capital fund raising to grow by 10% to 20%. Meanwhile, just under 40% expect private debt funds to experience an increase of up to 10%.
Optimum distribution
There are three ways in which US private asset fund managers can distribute their funds in Europe.
The first method is known as passporting. With this strategy, managers establish their fund within the EU and employ an EU-authorized Alternative Investment Fund Managers (AIFM). Then they use the latter’s marketing passport to distribute their funds throughout the region.
The second option is the National Private Placement Regime (NPPR). This approach permits Alternative Investment Funds (AIFs) and managers located outside the EU to market their funds separately to individual Member States.
Hence, due to the lack of homogeneity in Europe, NPPR requirements differ from country to country, with some countries not permitting it at all.
The third method is reverse solicitation, which was popular among some non-EU managers during the early days of the Alternative Investment Fund Managers Directive (AIFMD). It allows foreign investors to initiate the contact with AIFs and managers within their own jurisdiction. However, this approach is now under stricter scrutiny by national regulators.
Our research indicates that passporting is the most likely of the three options to experience growth, largely because it provides the easiest and broadest market access when partnering with an AIFM.
Approximately, 6% of respondents say passporting will rise by between 25% and 50%, and 16% believe usage will rise by between 50% and 75%.
Outsourcing support
Given the many challenges facing non-domestic managers when entering the European market, 85% of US managers surveyed expect to increase the level of outsourcing of their European business over the next five years, with 28% predicting dramatic rises.
It’s important to note that outsourcing offers several advantages. 70% of respondents find that it simplifies the launch of different product sets, while 60% appreciate the greater speed to market. Additionally, 46% value the enhanced transparency in reporting that outsourcing provides.
Among the available options, AIFM support is the most popular method for raising capital in Europe. 60% of fund managers chose this option as it provides the freedom to domicile their fund in any EU jurisdiction.
Optimist in the UK
UK private capital fund managers are just as optimistic about sector growth as their US counterparts.
They believe the sector will grow from the US$13.01 trillion in June 2024 to an average US$22.02 trillion by 2030. Almost all (94%) of the UK managers surveyed are currently raising capital in European markets, and the remaining 6% plan to start within the next 12 to 24 months.
Attractive risk-adjusted returns across all private markets serve as an obvious draw for investment. Therefore, the question that arises is: where do they expect client flows? Private equity, venture capital and infrastructure are predicted to see the biggest percentage gains, with 46% of managers expecting these to grow up by between 20% and 30%.
In real estate, almost three-quarters (70%) of managers expect fundraising to rise by 10% and 20%. For private debt, 40% of managers anticipate an increase of 10% to 20%, while 12% expect a rise of more than 30%.
DC Pensions
Private market assets are severely underrepresented in the portfolios of UK-defined contribution (DC) pension investors compared to their global peers.
While UK DC schemes invest only 0.5% in private markets, other countries are much higher: Australia at 20%, the Netherlands at 7%, and Spain and Denmark at 5%.
The UK government is making concerted efforts to encourage more DC investment in private markets through a series of reforms announced in July 2023. These reforms include an industry-driven initiative in which several of the UK’s largest pension providers pledge to allocate at least 5% of their default funds to unlisted equities.
Regulatory Barriers
Despite recent efforts from policymakers to make it easier for retail investors to allocate to private markets, US fund managers still face significant challenges in Europe. The main obstacle they cite is corporate governance, followed by a complex regulatory environment.
Three-quarters of US respondents find EU and UK ESG regulations to be a deterrent in raising capital in Europe. However, 8% believe these regulations are not restrictive, and 16% see them as presenting opportunities.
Thus, as the regulatory issues facing fund managers increase, it becomes even more appealing for them to work with specialist third-party solution providers to help them address these challenges.
Conclusion
Ultimately, the financial services sector is facilitating access to private markets, especially for new entrants, such as UK DC schemes. Despite this progress, private markets still face significant challenges. These include navigating non-domestic markets, dealing with regulatory complexity, overcoming technology limitations, addressing gaps in in-house expertise and knowledge, and finding suitable investment products.
To tackle these obstacles and support growth in private markets, partnering with third parties offers a way to overcome such obstacles and to facilitate the successful growth in private markets. Asset owners and wealth managers need to tap into specialist expertise across all areas of the fund lifecycle and in all relevant jurisdictions to leverage providers with robust infrastructure and access to the latest technology.
