The asset management landscape is rapidly evolving, with private markets set to exceed the revenue generated by traditional investment strategies by 2027, according to Morningstar’s latest European Asset Manager Pulse.
Private equity now accounts for 39% of private markets, with ongoing consolidation enabling leading private market players to scale further and access untapped opportunities, the report revealed. Meanwhile, stricter banking regulations that limit traditional lending are creating demand for alternative financing solutions for growth companies and non-standard cases via private credit.
Real estate, infrastructure and renewable energy investments are reaping the benefits, fuelled by sustainability initiatives, digital transformation and increasing demand for data centres.
Elsewhere, the secondaries market is expanding, improving liquidity and efficiency in private markets by enabling more active trading of private assets.
Challenges and opportunities
The report also outlined several challenges and opportunities in private market investment over the next few years. Large cash holdings and low allocation to growth assets among European households, for example, create long-term pension risks – yet they also represent a major untapped opportunity for asset managers.
Additionally, €160bn of loans require refinancing in the next four years, representing a critical turning point for both private equity and private credit. Lower interest rates will play a key role, but economic stress could alter the narrative.
Additionally, the European asset management industry is rapidly consolidating with recent high-profile mergers such as BNP Paribas acquiring AXA Investment. This is paving the way for scale advantages amid growing competition, but Morningstar’s analysis shows that mergers done only for scale often fail to deliver the promised synergies.
The rise of European megafunds, bolstered by North American commitments and competitive management fees, is also creating a concentrated power dynamic, the report stated. Investors are increasingly drawn to private equity firms with comprehensive strategies and proven track records, streamlining due diligence processes and relationships.
Johann Scholtz, senior equity analyst at Morningstar, noted: “The dynamics within Europe’s asset management industry are undergoing a profound shift. An increasing focus on private markets, coupled with the rising dominance of megafunds and the urgency to address pension shortfalls, creates opportunities for firms to strengthen their competitive positioning. Forward-looking players who act now are well-placed to capture untapped growth.”
FCA finds ‘room for improvement’ in private market valuation processes
Earlier this week, the Financial Conduct Authority’s (FCA) review of private market valuation processes found “room for improvement”.
Although firms generally demonstrated good practice in areas such as investor reporting, process documentation, use of third-party valuation advisers and consistently applying valuation methodologies, the FCA found that firms needed increased independence and better identification and documentation for potential conflicts of interest. Some firms also needed to enhance processes for ad hoc valuations in times of market disruption.
Improvements in these areas are particularly important with growing retail investor exposure to private assets, the FCA said. Private markets have grown significantly in recent years with the UK continuing to be the largest centre for private market asset management in Europe.
Camille Blackburn, director of wholesale buy-side at the FCA, said: “The UK is the largest centre for private asset management in Europe. Investor demand from individuals and institutions has driven significant growth.
“Good valuation practices are key to maintaining fairness and confidence as the market grows. We were pleased that firms could usually evidence independence, expertise, transparency and consistency in their valuations process.
“There is still more to do, and we expect firms to carefully consider our findings.”
The findings will be used in the FCA’s review of Alternative Investment Fund Managers Directive as it updates its rules and will inform the FCA’s contribution to IOSCO’s review of global valuation standards to support the use of proportionate and consistent valuation standards globally in private markets.
