Optimism was a major theme in asset management firms’ third-quarter earnings calls, transcripts show. Firms mostly focused on increasing inflows and fee revenues, as well as growing their assets under management in Q3; some even reported the best results in their history.
Driving the optimistic attitude was the demand for private assets across the investor spectrum; everybody wants a piece but there aren’t currently enough private assets in the market to satisfy demand. The alternative investment industry still represents a small portion of investable assets globally and the largest asset managers are capitalizing on this tremendous opportunity.
Here are the key themes that arose under opportunities and headwinds:
Opportunities
1. Partnerships to enable growth
Historically, creating the proper infrastructure for distribution and marketing to reach investors outside of traditional institutional investors was not something alternative asset managers prioritized. Now, with surging demand for private assets, the largest asset managers are building out these capabilities rapidly through partnerships with various intermediaries. One firm reported 50% growth in terms of platforms that their products are offered on through expanded distribution channels with partners.
The intermediaries on the other side of these partnerships are also benefitting as they now have more investment products to offer their clients to satisfy their need for private investments and help diversify their portfolios in new ways.
2. Blending of public and private markets with innovative products
Many firms have been able to gain a piece of the retail market by offering innovative products that appeal to individual investors. These products are predominantly focused on private equity, infrastructure, real estate, and credit as the preferred asset classes.
In terms of progress in accessing this retail capital, one firm reported individual fundraising is on pace to increase 50% year-over-year in 2024, with 11 wealth products currently focused on this market, six of which have been in the market for a year or less. Another firm reported a record $1.8 billion wealth inflows, nearly tripling the amount reported in Q2 and increasing global wealth AUM by 70% year-over-year. Another firm reported a record quarter for raising capital, driven by their retail private credit fund.
Product capability will continue to diversify as firms continue to build out offerings tailored to individual investors. Firms anticipate most investors’ portfolios will eventually contain investments in both the public and private markets, blending these two domains. The way alternative investments are structured will continue to evolve.
3. Infrastructure
Rapid advancements in technology such as artificial intelligence (AI), along with climate change, aging infrastructure, electrification and the energy transition, are driving an unprecedented need for investments in infrastructure as an asset class. Infrastructure demand is up on all fronts: transportation, energy, utilities, and digital infrastructure such as data centers, 5G technology and satellite networks. Investors see these as long-term opportunities and the way of the future.
Asset managers are capitalizing on these infrastructure needs and tapping into a long-term investment opportunity estimated at trillions of dollars. Analysis done by Preqin of the growth trajectory suggests that infrastructure will be among the fastest-growing asset classes, with a compound annual growth rate of 10.8% on assets under management out to 2029. Based off the most recent round of earnings calls, it seems like the firms agree. Some firms have been expanding their investment capabilities and capital base in the industrial and renewable energy markets for over a decade to take advantage of opportunities like this one.
Headwinds
1. Cost to access retail capital
The tremendous opportunity to gain some of the share in the retail capital market comes with many challenges. Operationally, this is no easy feat, hence the reliance on intermediaries. The resources and infrastructure needed to serve a large wealth channel participant will most likely not make sense for an asset management firm unless they are offering multiple products at a large scale while delivering above-benchmark returns.
Firms are calling for continued simplification and operational improvements to better serve the retail channel. Additionally, asset managers must carefully consider the complexity of the products offered and whether they need to be simplified. Individual investors will require educational services to fully understand the products being offered to them.
2. Managing uncertainty in a changing environment
Capital costs easing will likely be a catalyst for transaction activity, including deployment and realizations. This is needed to fuel the next round of fundraising. Since the Federal Reserve began its interest rate tightening cycle in 2022, fundraising has been a challenge for the asset management sector. Since the Fed began its rate cutting cycle, fundraising was expected to improve a bit more than it has. Limited realizations impact reinvestment capacity. One firm reported $26 billion raised YTD, which may fall short of the $40 billion targeted for the full year.
In a rate hiking or cutting cycle, managing the transition is crucial to properly model out results. Asset managers will need to carefully manage spread dynamics in changing rate environments. While interest rate cuts will reduce the fees generated from their credit vehicles, this can in part be offset from increased M&A transactions in their private equity vehicles. Although the overall outlook is positive, this might not materialize until 2026. There is more uncertainty in near-term deployment and exit activity.
