Private Markets in Asset Management

Asset Management in Focus – Edition 6

Welcome to Asset Management in Focus, a series which has been designed to give you an in-depth look into topics within the Asset Management sector.

Edition 6 looks at unlocking the potential of private markets and how to navigate opportunities and challenges in the evolving asset management landscape.

Conor Moroney, a Director in KPMG’s Asset Management practice, summarises the growing prominence of private markets, exploring the factors driving investor interest, the challenges of managing illiquid assets, and how asset managers can leverage this trend for long-term success.

The rise of private markets in asset management

In recent years, the asset management industry has witnessed a significant shift, with private markets gaining prominence. Investors, driven by a quest for higher returns and diversification, are turning to private equity, real estate, infrastructure, and venture capital. These asset classes are increasingly challenging traditional investments such as public equities and bonds.

As appetite for private markets grows, asset managers must navigate a complex array of opportunities and challenges. This blog explores the factors driving this trend, the implications for asset managers, and how they can capitalize on it while managing risks.

The allure of private markets: Why investors are flocking in

1. Higher returns in a low-yield environment

Low interest rates and subdued bond yields over the majority of the past decade have driven investors to private markets, where historically higher returns are often achieved through an illiquidity premium. Private equity firms, for instance, invest in companies at various stages, driving operational efficiencies and growth, and ultimately realizing gains through exits like IPOs or acquisitions. Infrastructure investments, especially in renewable energy or transportation, offer long-term stable cash flows.

2. Diversification and risk mitigation

Private market assets provide diversification, acting as a buffer against public market volatility. With inflationary pressures and geopolitical risks unsettling traditional asset classes, private assets like venture capital in emerging technologies or infrastructure projects offer stable, inflation-hedged income streams that are less correlated with public markets.

3. Access to value creation beyond public markets

Private markets allow investors to tap into earlier-stage growth before companies go public, capturing more value. The rise of unicorns – privately-held startups valued at over $1 billion – demonstrates the innovation and growth happening outside of public markets. For asset managers, this represents an opportunity to offer clients access to high-growth companies, particularly appealing to high-net-worth individuals and institutional investors.

Challenges in private market investing

While private markets present significant opportunities, they also pose challenges, especially for asset managers accustomed to public markets.

Valuation and transparency
Valuing private market assets is complex due to their illiquidity and lack of market prices. Limited transparency compared to public markets can further complicate performance evaluation and due diligence. Asset managers must have strong valuation processes, using third-party appraisals, stress testing, and scenario analysis.
Liquidity constraints
Private market investments typically involve long holding periods, sometimes over a decade. This illiquidity can complicate portfolio rebalancing or meeting liquidity needs. Asset managers need to clearly communicate these constraints to clients and carefully consider the overall liquidity profile of their portfolios.
Regulatory and operational complexity
The rise of private markets brings increased regulatory scrutiny, focusing on transparency, risk management, and investor protection. Asset managers must navigate this evolving environment while managing the operational complexities of private market assets, including third-party relationships and complex structures. Investing in the right technology and operational capabilities is crucial to effectively managing these challenges.

How asset managers can capitalise on the private market boom

Despite these challenges, private markets offer significant growth opportunities. Asset managers can take the following steps to maximise their potential:

Diversify offerings across private markets
Asset managers should expand their product offerings to include a range of private market assets like private equity, real estate, infrastructure, and venture capital. This diversification allows them to meet the growing demand from institutional and retail investors for alternative sources of return.
Leverage technology for better valuation and transparency
To address challenges around valuation and transparency, asset managers should invest in technology. Blockchain (tokenisation) can improve transaction transparency, while AI-driven tools can assist with more accurate valuations and risk assessments.
Enhance client education and communication
Given the complexity of private market investments, asset managers must educate clients on the risks and opportunities involved. Regular communication, focusing on the illiquid nature of these assets and expected returns, is key to managing client expectations and fostering trust.
Build partnerships for access to deal flow
Developing strong relationships with private equity firms, venture capital funds, real estate developers, and infrastructure project managers provides asset managers access to high-quality deal flow, giving them a competitive edge in sourcing attractive opportunities.

How can KPMG help?

KPMG is uniquely positioned to help asset managers and investors navigate the complexities of private markets. Here’s how we can support your organization:

Advisory services for private market strategy
KPMG provides strategic advisory services to help asset managers develop and implement private market investment strategies, aligning with their clients’ goals and risk appetite.
Valuation and risk management
KPMG offers independent valuations and risk management solutions, helping asset managers accurately value illiquid assets and manage unique risks associated with private market investments.
Regulatory compliance and reporting
We assist asset managers in staying compliant with evolving regulations, including disclosure requirements and ESG reporting. Our regulatory experts help build robust compliance frameworks, ensuring adherence to global standards.
Technology and data solutions
KPMG provides tailored technology solutions to improve operational efficiency, enhance data analytics, and ensure transparency in private market investments.
Outsourced financial reporting solutions
We offer outsourced financial reporting solutions allowing asset managers to focus on core investment activities.
Tax planning and structuring
KPMG’s tax advisory services provide support in structuring tax-efficient investments across private equity and infrastructure, ensuring compliance with cross-border tax regulations.

Conclusion

Private markets are transforming the asset management landscape, offering an attractive alternative to traditional investments. By embracing diversification, leveraging technology, and enhancing client education, asset managers can thrive in this growing sector. With KPMG’s multidisciplinary expertise, asset managers can confidently navigate private markets, optimizing opportunities and managing risks effectively.