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  5. Alternatives and Private Markets: Embracing next generation technology playbooks to transition from analog to digital

Alternatives and Private Markets: Embracing next generation technology playbooks to transition from analog to digital

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15 December 2023
Cubillas Ding

Abstract

Private market asset managers were not immune from the post-pandemic, macroeconomic headwinds and recent market volatility – with operating margins coming under pressure and exacerbated by operational complexity and siloed technology/operations across liquid and illiquid asset classes.

Nevertheless, in the longer-term horizon, much has been posited about alternatives and private markets' continued growth and potential for returns. It is expected that private markets investing will continue to contribute to the growth of global assets under management (AuM) at a compound annual growth rate (CAGR) of over 13% in the next five years, but at a slower rate relative to past years.

Historically, general partners (GPs) and limited partners (LPs) in these markets have not always been quick to adopt new technologies. However, forward-thinking firms are now recognizing the importance of embracing new imperatives. There are several key themes that are driving these changes.

  • Upcoming regulations in Europe, such as ELTIF 2.0 and UK LTAF are setting the stage for a more favorable environment for broader retail participation.
  • Beyond the already sizable institutional space, the retail Wealth/ High-Net-Worth-Investor (HNWI) segment represents an important ~$1.5TN AuM global opportunity by 2025. This is coming from a relatively modest base where proportion of retail client assets currently invested in private markets are much lower compared to institutional segments.
  • Institutional investors continue to be demanding, pushing for more sophisticated investment solutions, while retailization trends will attract greater regulatory scrutiny, protection and accountability. Increased sophistication and outcome-focused priorities will add complexity to the investment process and push for greater operational integration towards total portfolio management approaches across private and public markets.
  • Retail demand for alternatives and private markets will be facilitated by the confluence of developments across several fronts: Modern distribution ecosystems, digitization of fund operations, and tokenization.

Looking forward, next-generation technology and data enablement will progressively become a differentiating factor across all aspects of prospecting, deal flow management, and private markets operations. In longer-term illiquid asset markets, the emphasis on technology is not primarily centered around transactional efficiency, as transaction volumes are lower compared to public market counterparts. Instead, firms that lead in this space place their emphasis on maximizing deal flow opportunities, optimizing long-term capital allocation and forecasting, strengthening operational resilience, and enhancing the effectiveness of total portfolio steering and oversight.

Asset and wealth management firms need to proactively embrace industry advancements, drive capability enhancements, and incorporate strategic considerations for future-proofing when selecting next-generation solutions to support and sustain their growth objectives. The technology solutions landscape for alternatives and private markets is diverse, encompassing comprehensive platforms and specialized providers. The emergence of network effects and ecosystem-driven propositions across public and private markets is giving rise to new approaches for delivering data and solutions. These evolving paradigms will create strategic "next wave" opportunities for managers and investors, fostering the widespread adoption of private markets investing.

This study explores the current trajectories around alternatives and private markets investing with a strategic lens, focused on where/how digitization, modern technology and potential innovations can create opportunities for sustained growth. The full report analyzes the landscape of technology providers in the alternatives and private markets industry, highlighting the areas where asset managers and investors can effectively capitalize on opportunities for transformation.

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Subscribing clients can access the full report through their Capital Markets research membership. For more in-depth research around future buyside, sellside and market infrastructure trends and technology insights, please explore Celent's Capital Markets practice.

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