New to Curatia?

See why finance counts on us for key market intelligence and industry trends.

Curatia Analysis for Tue, Jul 9

Can Private Equity Avoid the Fate of Asset Management?

Private equity firms’ continued success has attracted a wealth of new entrants to the space, ratcheting up the industry’s competitive dynamics. At the same time, recent data augurs a slowdown in fundraising as investors fret over a potential market downturn.

Those trends raise the prospect of future fee wars in private equity akin to those in asset management — a possibility that’s already spurring private equity firms to diversify their operations.


Private equity markets have grown sixfold since 2000, with PE firms now managing $3T. A May research note from BAML saw no end in sight for that trajectory.

Those grounds for unbounded optimism have touched off dealmaking and hiring sprees in an industry racing to spend a record $2.5T cash pile. Private equity firms tallied $256B in LBOs in H1 2019 — good for 13% of global M&A activity and the second-largest first half on record.

Firms are also beefing up their staffs and boosting compensation. 77% of PE and VC executives plan to hire staff in the coming year, a June poll found. A separate survey of middle-market PE firms revealed that most employees saw bigger-than-expected 2018 bonuses and are earning bigger base salaries this year.

If You Can’t Beat ‘Em…

Windfall profits have attracted new entrants to the space — particularly from squeezed industries like banking and asset management.

Goldman Sachs is reportedly cobbling together units investing in private companies and real estate and “planning a fundraising blitz.” At $140B in AUM, Goldman’s new unit would be nearly the size of KKR and a third the size of PE colossus Blackstone.

Indexing giant Vanguard is likewise contemplating a push into private equity. Asset management rival BlackRock is currently fundraising for its Long Term Private Capital fund, which sports fees half those of most PE funds. And BlackRock-backed iCapital is working with Nasdaq to build a platform that lets individual investors sell their PE fund stakes in a secondary market.

For asset managers, offering one or more private-equity funds offers a path to higher margins in an era of vanishing passive-investing fees. It would also lock in institutional investors for years, helping shield firms from the fallout of a potential market downturn.

But asset managers would also be bringing the low-fee mentality of the index fund world to private equity. And, as newbies with fewer connections and less expertise than established PE players, they’d almost certainly seek to differentiate themselves on cost — a move that could break through the heretofore impenetrable wall of conformity in private equity fees.

Even quant funds have gotten in on the act, with Man Group and Two Sigma both launching funds that seek to mimic the performance of private equity funds at a fraction of the cost.


The rush of new entrants to private equity risks creating a logjam in the space even as it enters a “worrying period of decline,” according to a new Preqin report. Just 244 funds reached a final close on fundraising in Q2 — a decline of 39% YoY decline and 51% versus 2017.

Moreover, the proportion of investors planning to restrict PE investments to a single fund leaped from 26% last year to 49% this year.

Those dynamics have private equity firms looking to branch out. PE firms and hedge funds reportedly boosted hiring of marketing and fundraising staff by 34% in Q1 as they prepare to sortie beyond their traditional client base of institutional investors into wealth management.

Blackstone is meanwhile aiming to build its insurance business into its largest, Executive Vice Chairman Tony James told investors last year. It is also “building businesses to invest in infrastructure, life-sciences and fast-growing companies.”

In some ways, those efforts seek to replicate private equity titans’ wildly successful, decade-long dive into private credit — a development that gathered pace after Blackstone bought GSO in a diversification play prior to the financial crisis.

A decade on from that seemingly prescient move, the key question in private equity appears to be which firms can curtail their exposure to the next downturn — those getting into the space, or those diversifying away from it?