Welcome to FT Asset Management, our weekly newsletter on the movers and shakers behind a multitrillion-dollar global industry. This article is an on-site version of the newsletter. Sign up here to get it sent straight to your inbox every Monday.
Does the format, content and tone work for you? Let me know: firstname.lastname@example.org
M&A to whittle down private equity industry to 100 ‘next-generation’ firms
Consolidation in private equity is rife right now, with deals this month including CVC’s purchase of a majority stake in Dutch infrastructure investor DIF Capital Partners, and Bridgepoint’s acquisition of US-based renewables specialist Energy Capital Partners.
One leading European private equity firm has a particularly stark prediction for how this wave of dealmaking might whittle down the sector to a fraction of the number of players it has today, write my colleagues Chris Flood and Will Louch in London.
The number of private market fund managers will shrink to as few as 100 over the next decade as higher interest rates, fundraising challenges and increasing regulatory costs drive a massive wave of consolidation, reckons David Layton, chief executive of Partners Group which oversees assets of $142bn.
Layton said in an interview that private markets had entered a “new phase of maturation and consolidation”. Managers responding to fundraising pressures in more difficult economic conditions and shifting towards wealthy individual clients as a driver of new asset growth, would drive a significant rise in mergers and acquisition activity.
Here’s how this could play out, says Layton:
“It is really only the large players that can withstand the forces reshaping the private markets industry. We could see the current 11,000 or so industry participants shrink to as few as 100 next-generation platforms that matter over the next decade.”
Assets held in illiquid private market strategies stood at $12tn at the end of December, according to consultancy Preqin. The firm estimated that total private markets fundraising dropped 8.5 per cent last year to $1.5tn with net inflows into private equity managers down 7.9 per cent to $677bn in 2022.
Many smaller PE managers have found the process of attracting new business increasingly difficult. The top 25 largest competitors have captured more than a third of the $506bn of new capital allocated to PE so far this year.
Layton added: “There is a real bifurcation between the managers that can raise money and those that cannot. This will accelerate the process of natural selection as the industry grows in size.”
Do you agree with this prediction? Email me: email@example.com
BlackRock and Amundi warn of rising US recession risk
Government officials and a growing number of investors believe the Federal Reserve’s interest rate rises will not damage the US economy significantly. But investment chiefs at two of the world’s largest asset managers are not so optimistic.
My New York-based colleague Kate Duguid and I spoke to investment chiefs at two of the world’s largest asset managers, BlackRock and Amundi, who warned that the risk of a US recession is rising. They’re concerned that while the US economy has largely looked resilient in the face of aggressive monetary tightening by the Fed, cracks are now appearing, notably in the labour market.
“The probability of a recession for us is very high,” said Vincent Mortier, chief investment officer at Amundi, which manages $2.1tn. “The question mark is how deep and how long . . . We are much more concerned by the dynamics in the US than the consensus,” he said, adding that he expected the contraction to come at the end of this year or early next year.
Rick Rieder, chief investment officer of global fixed income at BlackRock, which manages $9.4tn, said he had become more pessimistic about the state of the US economy in recent weeks. While he thought the country would avoid a severe recession, he said a slowdown had already begun.
“We had been pretty enthusiastic about the economy. But now, ironically, when I think people have written off a recession . . . now I actually think we are seeing some tangible signs of slowdown. I don’t think you can write off a recession.”
Both are now “overweight” US government bonds in the belief that the Fed may already be done raising rates and that Treasuries would perform well during a period of economic weakness. Both also expect the dollar to fall.
Mortier said a weaker jobs market would sap consumer demand, putting pressure on corporate margins as companies lowered prices to compete for market share. “The US consumer is exhausted,” he said.
Meanwhile, he thinks corporate balance sheets will become more stretched as companies depleted their cash reserves and needed to refinance at higher interest rates. “There is a wall of refinancing coming,” he added.
Mortier also pointed to the high level of US government debt, which limited the ability for US authorities to increase support for the economy.
Amundi is shorting the dollar, although its CIO admitted it was a “tricky” bet given that the currency was a haven asset that could benefit during market shocks.
Chart of the week
Share buybacks on the US stock market have dropped to the slowest pace since the early stages of the Covid pandemic as rising interest rates undermine the incentive for companies to purchase their own shares, writes Nicholas Megaw in New York.
Companies in Wall Street’s benchmark S&P 500 index spent $175bn buying back shares in the three months to June, according to preliminary data from S&P. That marked a 20 per cent decline from the same quarter last year and a 19 per cent decline from the first three months of 2023.
Analysts say the slowdown is likely to mark the beginning of a longer-term trend that could put downward pressure on stock markets.
“Structural reasons as well as the interest rate environment are both contributors,” said Jill Carey Hall, equity and quant strategist at Bank of America. “We would expect buybacks to not be as big for the foreseeable future.”
Corporate buybacks have become an increasingly important but controversial part of stock markets in recent years. They can directly prop up share prices by adding to demand and also help improve profitability on an earnings per share basis by reducing the number of shares in circulation.
However, critics of share buybacks accuse company boards of using them to artificially inflate their share prices and reward senior executives instead of spending on long-term investment or increasing pay for lower-paid employees.
Five unmissable stories this week
Private equity, venture capital and hedge fund groups are preparing to spend billions of dollars on compliance and legal advice as they cope with the biggest regulatory changes to hit the industry since the aftermath of the 2008 crisis. The US Securities and Exchange Commission’s decision last month to adopt sweeping new rules for the private fund industry is prompting some smaller fund managers to look for their first full-time general counsels and chief compliance officers.
Blackstone will combine its insurance and credit businesses into an integrated unit called Blackstone Credit & Insurance, which chief executive Steve Schwarzman says could grow to manage $1tn in the next 10 years, up from $295bn today. The move signals that the world’s largest alternative asset manager considers its growth prospects in the decade ahead lie away from the traditional private equity buyout and real estate businesses that have long been its cornerstone.
The Chinese property sector has emerged as the biggest threat to the stability of the global economy, fuelling a “dramatic shift” out of emerging market stocks and into the US, according to Bank of America’s monthly investor survey.
Private equity firms have started to borrow against their funds to backstop overly indebted portfolio companies, a new financial engineering tactic meant to cope with higher interest rates and a slowdown in dealmaking.
St James’s Place has appointed Mark FitzPatrick, a former senior executive at UK insurer Prudential, as chief executive officer. He takes over from Andrew Croft, just as the UK’s largest wealth manager faces increasing scrutiny over its fees.
To the V&A in London, where a new blockbuster exhibition, Gabrielle Chanel: Fashion Manifesto, highlights both the designer’s revolutionary approach and her many links with Britain. Indeed part of the Chanel myth is how, during her affair with the Duke of Westminster in the 1920s, the designer fell for his tweeds, appropriating them for her own ends. I always loved the story that the motifs on the black lamp posts in the City of Westminster — two letter Cs back-to-back — were a loving gesture by the duke to his paramour. But alas, I learnt recently that the story is apocryphal: the ‘CC’ merely stands for ‘City Council’.
Future of Asset Management North America
Hosted by the Financial Times, in collaboration with Ignites and FundFire, Future of Asset Management North America is taking place on September 27-28 at etc.venues 360 Madison in New York. It will bring together senior leaders from North America’s leading asset and wealth management firms, including Capital Group, BlackRock and Goldman Sachs. For limited time, save up to 20 per cent off on your in-person or digital pass. Register here