Private equity consolidation: mega manager may go the way of Big Tech


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When will regulators turn their collective gaze from Big Tech to Big Private Equity?

The so-called alternative assets industry has muddled through a difficult year to date. The dearth of M&A and IPOs have kept managers from returning cash to their limited partners. In turn, those LPs are proving unwilling to commit new money to funds. According to data from Preqin analysed by Bain & Company, the funds attempting to raise $3tn from investors will only raise $1tn.

More ominously, that crunch could affect the viability of some private capital managers. One industry luminary, Partners Group which manages $142bn, says that a broader shift is accelerating. According to Partners, the industry will contract to just 100 “next generation” firms.

Every maturing industry experiences concentration. The question is whether asset allocators will be truly satisfied sending cash to a handful of fund complexes.

For junior and mid-level executives, the wealth opportunity in private equity is not likely to be at these big firms, either. Money incentivises and retains up-and-coming stars. But senior managers who arrive early will not be quick to give up their equity stakes. In his late 70s, Stephen Schwarzman still earns $1bn a year from Blackstone in dividends and carried interest. Pay-focused professionals can likely make far more money by launching their own fund than just climbing the ladder at an incumbent. 

In fact, the fastest growing strategies of alternative assets such as credit, real estate, and infrastructure came via start-up firms. Many of these pioneers have been acquired by big players but still several remain independent.

High concentration could also become an issue for regulators. As with the tech sector, they may decide to crack down on further consolidation among asset managers. Preserving a landscape of innovation should be a priority. Do not discount the opportunity for entrepreneurship and innovation from upstart funds.

This post was originally published on Financial Times

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