Private markets consolidation is on the rise

Private markets have long stood as a cornerstone of robust growth and dynamic opportunities for investors and asset managers alike. However, the landscape is undergoing a significant transformation, marked by a wave of consolidation among private market-focused asset managers.

A complex interplay of factors, including macroeconomic headwinds, rising financing costs, inflationary pressures, and the ever-increasing burden of regulatory compliance, has multiplied the challenges for asset managers, who also face intense fundraising pressures and a competitive environment that demands greater operational efficiency. Amid these conditions, one of the most compelling forces behind this consolidation surge is the imperative for asset managers to diversify their portfolios and enhance their capabilities.

Diversification has become a strategic necessity as firms seek to mitigate risks, capitalize on new growth avenues, and better serve a broader client base.

Strategic acquisition of firms with complementary strengths allows asset managers to expand their reach, innovate their offerings and achieve economies of scale, as underscored by recent high-profile transactions such as General Atlantic's acquisition of Actis and BlackRock's acquisition of Global Infrastructure Partners. These are not reactive measures, but proactive strategies aimed at positioning firms favorably for the future.

As we delve deeper into the factors driving consolidation, this write-up particularly focuses on the need for diversification and how it shapes the strategies of leading asset managers. Ultimately, we believe consolidation is likely to persist, reshaping the private markets landscape and defining strategic imperatives for asset managers in the years ahead.

Factors driving consolidation

We see at least four factors altering the private markets landscape at present:

• Diversification: In an increasingly complex and volatile market environment, asset managers are compelled to diversify their portfolios to enhance resilience and growth potential. This involves expanding into new markets, asset classes and geographies to offer a wider range of investment options to clients. Building a diverse portfolio from scratch is often time-consuming and resource intensive. Therefore, many firms prefer acquisitions as a quicker and more effective strategy to achieve diversification. Recent strategic transactions by major firms such as General Atlantic's acquisition of Actis reflect this move towards diversification.
• Fee pressure and regulatory costs: The rising costs associated with regulatory compliance and operational fees are exerting significant pressure on asset managers, particularly smaller firms. These increased costs make it challenging for smaller firms to maintain profitability and a competitive edge, prompting many to consider mergers or acquisitions as viable solutions. By merging with or being acquired by larger firms, smaller asset managers can achieve economies of scale, reduce regulatory burdens, and ensure their long-term viability. Stringent regulatory requirements and escalating compliance costs are thus major drivers of consolidation.
• Fundraising pressure: Fundraising in private markets has become increasingly concentrated among large asset managers. In 2023, the top 25 managers accounted for 41% of all funds raised—their highest share since 2008. This trend, often described as "capital rotation," sees limited partners (LPs) preferring to invest with well-established general partners (GPs) during periods of market uncertainty. Concentrated fundraising poses significant challenges for smaller and newer managers who typically find it difficult to compete for investor capital against larger, more established firms. As a result, many smaller managers are turning to mergers and acquisitions (M&A) as a strategy to enhance their fundraising capabilities and secure their position in the market.
• Publicly listed firms’ race to AUMs: Publicly traded asset managers face constant pressure from investors to increase their assets under management (AUM). This stems from shareholder expectations for continuous growth in fee-bearing AUMs. Public alternative managers have been particularly active in the M&A space, accounting for 84% of deals since 2012, as per Preqin. These firms possess the financial firepower, in the form of robust balance sheets and liquidity, to pursue strategic acquisitions. This competitive drive to rapidly scale AUMs is a significant factor propelling consolidation in the industry.

Areas of diversification and their drivers

As highlighted in Exhibit 1, infrastructure/real estate and the Asia-Pacific (APAC) are emerging as the two major areas for diversification. Seven of the 11 deals outlined in the exhibit are focused on either infrastructure or the APAC. Larger firms continue to strengthen their infrastructure arms or build their Asia practices as they look to expand their offerings.

Major reasons for increased interest in these areas are discussed in detail below:

Infrastructure/ real estate assets

Among asset classes, infrastructure is clearly emerging as the favorite. According to the Global Infrastructure Hub, global spending on basic infrastructure is expected to touch $79 trillion by 2040, while the actual investment needed is estimated at $94 trillion. This translates to approximately $3.7 trillion in investment each year. Investing in infrastructure is beneficial as the underlying assets offer stable, reliable, and consistent cash flows that improve risk-adjusted returns and provide downside protection.

The growth in infrastructure is supported by long-term, secular tailwinds such as decarbonization (growing need as countries focus on their net zero targets), digitalization (growth in telecommunications and 5G infrastructure), and mobility (demand for robust transportation structures). These megatrends are particularly beneficial for infrastructure supporting energy transition, urban logistics, fiber broadband, cell towers and data centers.

APAC

Some of the world’s biggest private market players see Asia-Pacific as one of the fastest-growing markets globally. In addition, a massive untapped private wealth market in the region also provides immense opportunities for private asset managers.

There are three major reasons for growing interest in the APAC:

• Macro tailwinds and favorable demographics: Investment opportunities in Asian markets are increasing, underpinned by robust macro tailwinds, structural reforms, favorable demographics, and an expanding middle class. The growing population of millionaires in the APAC also enhances its appeal.
• Undervalued and high-quality issuers: Asset prices being reset, particularly due to defaults by Chinese property developers, has created more attractive entry points in the region compared with similar deals in the US and Europe. This presents a lucrative opportunity for investors seeking high-quality issuers at lower valuations.
• Demand-supply gap: In Asia, demand is outpacing supply, primarily because of tightened lending criteria and lower investor support. That, too, despite high market volatility. This gap creates a favorable environment for private asset managers to step in and fill the void.

Consolidation wave to continue

As asset managers navigate the complex dynamics, the strategic acquisition of complementary businesses has emerged as a crucial avenue for growth and stability. Key areas such as infrastructure/real estate and the APAC are at the forefront of this diversification, offering robust opportunities supported by long-term secular trends. With macro tailwinds, favorable demographics, undervalued high-quality issuers, and a demand-supply gap creating ripe conditions for investment, the APAC is set to be a focal point for expansion.

As larger firms continue to acquire smaller ones, achieving greater scale and operational efficiency, the consolidation trend is expected to persist. Big players will become bigger, position themselves better to capitalize on the emerging opportunities. The ability to offer a broader range of investment options, enhanced risk-adjusted returns, and robust operational capabilities will set these firms apart in a competitive landscape.

Ultimately, this consolidation will reshape private markets, driving innovation and growth while setting the stage for a more dynamic and resilient industry in the years ahead.

References:

McKinsey Global Private Markets Review 2024: Private markets in a slower era
Global infrastructure investment need to reach USD97 trillion by 2040
The rise of Asia’s wealth will boost its resilience | HSBC Views
Why PE industry consolidation is a double-edged sword
Big gets bigger: How consolidation is reshaping Private Equity?
Private Credit in Asia Pacific: A Region on the Rise