It will be news to no one that traditional asset managers are enthusiastically expanding their alternatives divisions.

The voracity of their dealmaking and their increasingly dominant share of private markets, however, may come as a surprise.

New research by Citywire has found that the world’s 25 largest traditional fund managers by assets under management (AUM) run more than $2.9tn (£2.6tn) in private assets and wider alternatives.

At the start of this year global alternative assets totalled $13.3tn, according to Preqin. The size of the alternatives market is only growing; the alternatives data provider tips it to hit $23.2tn by 2026.

The motivation for traditional asset managers to seize a slice of this pie is clear: assets are stickier, fees are higher and client demand is seemingly strong as public equities and bonds face a rocky road.

Much of their increased share of the alternatives market has come in the past couple of years and has been driven by acquisition (see timeline), heavy investment in existing, previously niche alternative divisions, and a spate of new fund launches.

BlackRock, for example, has $330bn in alternative assets today.

The group said this had been driven by a surge in inflows, with clients placing a net $52bn in alternatives in 2021, of which $42bn was to private markets and $10bn to liquid alternatives – up from just $5bn in such inflows five years ago.

But there is still room to grow.

Of the $62tn managed by the world’s top 25 asset managers, only 5% is in private and alternative assets. It is difficult to calculate a set figure just for private assets, as some firms only disclose AUM for their alternatives divisions, which could in some cases also include liquid alternatives.

This figure is also missing the assets Vanguard manages in two recently launched private equity funds, as the group has not disclosed this information.

Even with such caveats, however, it is clear that the volume of assets run by the world’s largest 25 asset managers could be larger still.

Many of the groups on the list (see above) told Citywire they are working on expanding their private assets arms further, with several highlighting it as a strategic priority.

Some are further ahead than others. PGIM, for example, manages around $268bn in AUM in private markets, making up about 16.5% of its total assets.

Franklin Templeton will run $257bn in alternative assets once it has completed its acquisition of European credit manager Alcentra, making up 17% of its total assets.

Not all attempts to expand into private assets have been wildly successful. Although BlackRock has managed to amass hundreds of billions in assets, its private equity franchise has had some challenges.

The group set out to raise $12bn for its Long Term Private Capital strategy but was only able to raise $3.4bn in its first close. According to Bloomberg, the group has restarted fundraising and is aiming to gather another $3bn in capital.

Of the top 25 asset managers, only BNY Mellon does not run a dedicated private markets fund, although the firm has a 20% stake in private equity firm Siguler Guff.

Fidelity Investments, which until recently didn’t have dedicated private markets strategies and invested in private companies through its mutual funds, just registered a private credit fund in September.

The fund has been set up as a perpetual business development company, targeting between $100m and $1bn. It is not to be confused with Fidelity International, which has been pushing into private markets, creating a private credit division last year.

To position for growth, 10 of the asset managers on the list have initiated some kind of restructuring of their private markets or alternatives division in the last five years.

Meanwhile, 13 of them have completed acquisitions in the past five years to supercharge their expansion into this area. Franklin Templeton, for example, has acquired secondaries specialist Lexington Partners and Alcentra from BNY Mellon.

In this rising-rate environment, private credit ‘presents a desirable fixed income product offering’ for traditional asset managers, according to PwC.

‘We expect private credit managers, in particular, will come to the forefront as attractive [acquisition] targets,’ the consultancy said in a recent report.

New divisions

Some have only established dedicated private markets divisions in the last few years, including Vanguard and JP Morgan.

‘Traditional asset managers are looking to expand into private equity to diversify their assets, expand the products they offer clients and increase investment returns,’ said Caroline Chambers, an asset management specialist at Accenture.

UBS said it has plans to double its alternatives business over the next two years, while Amundi is aiming to grow its alternative assets to €90bn (£79.7bn) by 2025 from the €65bn it managed in March.

Wellington called expanding its alternatives business a strategic priority, while for Natixis, private markets are one of its key objectives in its 2024 plan.

A Wellington spokesperson said: ‘We have two privates platforms – late-stage growth and biotech – and are seeking to expand our offering where we have adjacencies, including more growth and venture-focused vehicles as well as private debt.’

Several market dynamics are driving this.

For one, clients are looking for better returns than they are getting from traditional equities and bonds. As companies stay private for longer, many of the higher growth opportunities are staying out of reach for mutual fund investors. And if asset managers cannot offer them access to those opportunities, those clients will start looking elsewhere.

‘Large asset managers that manage money on behalf of clients are looking for greater returns and to diversify their portfolios,’ said Nalin Patel, an analyst at PitchBook. ‘Usually, the traditional area they would target is in the private markets.’

At a time when more investors are turning to passive strategies, putting pressure on mutual fund fees, private markets also offer higher fees with a typical ‘2 and 20’ model – 2% management fee and a 20% share of the profits after a set hurdle – and a lock-up of capital for several years.

Tapping retail

Another trend that can be seen in Citywire’s findings is the extent to which asset managers are trying to widen access to private markets. They want to offer their newly acquired alternative capabilities to their existing retail client base of fund and exchange-traded fund investors.

Many see an opportunity to distribute funds and solutions to wealth managers and financial advisers – a group of investors that had been typically left out of investing in private assets due to high minimum investment requirements, regulatory restrictions and liquidity requirements.

Of the 25 asset managers featured in Citywire’s research, 18 said they already have alternative products for non-institutional investors and are looking to expand in this area.

‘We see opportunity in the wealth channel globally and are strategically scaling our platform to serve this segment. Our offering for the wealth channel includes alternatives funds, and we are increasingly focusing on private markets,’ the Wellington spokesperson said.

Several asset managers have already launched products for individual clients. For example, Schroders offers its Specialist Private Equity fund, and the UK-listed British Opportunities and UK Public Private investment trusts.

Natixis said it recently launched a strategy to give wholesale clients access to private markets.

‘Traditional asset managers see this opportunity and are expanding their investment capabilities to meet the future needs of the market: the democratisation of private markets,’ Accenture’s Chambers said.

‘Our recent research supports this: 78% of UK asset management executives say they are looking to acquire new capabilities in order to expand investment capabilities and access new markets.’

In the US, many asset managers have invested in technology and operations platforms that aim to make alternative funds more easily available to retail investors.

One such platform, iCapital, counts UBS, BlackRock, AMG and Morgan Stanley among its backers and offers 1,080 funds with a combined $136bn of assets from a wide range of managers, including Franklin Templeton, which also has products on one of iCapital’s competitors, Cais.

A spokesperson said: ‘[Franklin Templeton] was founded on the principle of helping investors participate in the stock market through mutual funds. We see the same type of opportunity in the alternatives space.

‘While early days, we are highly focused on being at the forefront of an upcoming wave of adoption of alternatives in retail channels, where today the penetration is very nascent: 3-5% share of total assets in alternatives, depending on the channel.’

Scaling and failing

Although private assets are seen as more lucrative because they can provide higher fee income and carried interest payments to asset managers, the move into this space is not without its challenges.

Private market investments require specialised talent, not just in investment management but in operations and technology.

In Chambers’ view, the challenge of ensuring firms can seamlessly support private equity across the value chain is one of the reasons most firms are making acquisitions and forming partnerships instead of building in-house divisions from scratch.

Another issue is managing the costs associated with scaling private equity investments.

‘Although next-generation technology promises efficiencies and access to these investments, the industry standard is still behind its public market counterparts,’ Chambers said.

‘Vendor technology and asset-servicing capabilities are evolving at an accelerated pace to support the forecasted growth of private equity operations, with many acquisitions also taking place in the asset-servicing space to expand services.

‘However, asset managers must be conscious that increased industry demand for these specialised services may create a bottleneck in implementation before operational efficiency can be realised.’

Do not ‘democratise’

Asset managers are eager to expand into private markets and take advantage of their relationships with their existing high-net-worth client base, but others have warned of the dangers.

In a July interview with Citywire, Oxford University professor Ludovic Phalippou described the trend dubbed ‘the democratisation of private markets’ as a ‘genius of marketing’ and warned of its dangers.

When private equity is taken more widely to retail investors, he believes it will be followed by a rise in lawsuits from clients who think they have been mis-sold products.

It is also a concern for some existing institutional investors. A survey by secondaries specialist Coller Capital found that nearly two-thirds of private equity fund investors are worried that retail investor access could negatively impact returns.

These concerns seem unlikely to slow the enthusiasm of traditional asset managers as they expand apace into this market.