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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 faced significant challenges this year. The lack of M&A and IPOs has prevented managers from generating returns for their limited partners, leading to a reluctance among LPs to invest new funds. According to data from Preqin analyzed by Bain & Company, the funds seeking to raise $3tn will only be able to secure $1tn.
More worryingly, this situation could impact the viability of certain private capital managers. Partners Group, which manages $142bn, predicts a broader shift in the industry, resulting in only 100 “next generation” firms remaining.
Concentration is a natural occurrence in maturing industries. However, the question remains whether asset allocators will be satisfied sending their cash to a small number of fund complexes.
For junior and mid-level executives, the wealth opportunity in private equity is unlikely to be found at these large firms. While money incentivizes and retains emerging stars, senior managers who have been with the company for a long time are unlikely to relinquish their equity stakes. Even in his late 70s, Stephen Schwarzman still earns $1bn a year from Blackstone in dividends and carried interest. Individuals focused on pay can potentially earn much more by launching their own fund rather than simply climbing the ladder at an established company.
In fact, the fastest growing strategies in alternative assets, such as credit, real estate, and infrastructure, have emerged from start-up firms. Many of these pioneers have been acquired by major players, but several remain independent.
The high concentration in the industry could also become a concern for regulators. Just like the tech sector, they may choose to crack down on further consolidation among asset managers. Preserving an innovative landscape should be a priority, as there is still ample opportunity for entrepreneurship and innovation from emerging funds.
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