In a Citi (NYSE:C) research report, diversified financials analyst Nicholas Herman and team explore private wealth, which looks poised for substantial growth with a total opportunity for the industry of as much as “$70 trillion by 2033.”
In Citi’s Deep Dive, they analyze drivers of future growth and the “evolution of key product and market trends.”
According to the investment-data company Preqin, over the past decade private capital has grown at “a 14% compound annual growth rate (CAGR) to ~$15 trillion, and is forecast to grow at a mid- to high-single-digit CAGR over the decade to come.”
This growth is seen coming from further runway “with institutional allocations as well as from private investor capital.”
Bain & Company estimate that while individual investors “hold roughly half of the approximately $300 trillion of global assets under management (AUM), those investors represent only 16% of AUM for alternative investment funds.”
Most of that 16% is held by Ultra High Net Worth individuals, generally defined as those whose net worth “exceeds $30 million; less wealthy individual investors, even ones with more than $1 million of investable assets, remain effectively de minimis.”
Concerns continue to increase around the lack of savings and future retirement income “for retail and mass affluent investors.”
Historically, the attraction of private markets for investors “has been the superior returns generated, and Citi think actively managed private assets could continue to outperform public markets for a number of reasons.”
First, the number of companies on public markets has shrunk, “with just 10 companies equating to 36% of the S&P 500.”
Private markets are also typically much less efficient than public ones, providing “greater opportunities for top managers to generate alpha.”
And they’re typically focused on faster-growing “middle market” companies instead of more mature businesses in public markets.
Even if one is skeptical about private markets’ ability to outperform public markets, it’s hard to argue “that investor portfolios shouldn’t diversify to make more use of private markets.”
Citi think conditions look good for wealth allocations to private assets to finally increase, “a shift that would have broad implications.”
Select asset managers, both alternative and traditional, will “benefit from faster growth.”
But brand, scale, performance, product mixes and distribution platforms point to a handful of asset managers “having a seat at the table, with some asset managers pressured as public-market assets are rotated into private-market assets.”
Citi expect that the evolution around this opportunity “to be a catalyst for industry consolidation.”
Beyond asset managers, a rise in alternative allocations by private investors will have implications “for banks, wealth managers, investment platforms and insurance companies, not to mention fund administration and infrastructure providers.”
Further growth in private markets will likely “result in even more value creation taking place away from public markets.”
The opportunity is large, given “low single-digit penetration” to private markets.
An expected acceleration in adoption by private investors is “expected to result in private-investor AUM growing at a 12% to 13% CAGR over the next decade.”
Citi‘s conservative assumption that private-investor allocations “could increase by 5 percentage points over the next 10 years implies a $22 trillion opportunity from private investors alone.”
Adding further growth on the institutional side, “supported by the likes of sovereign wealth and insurance, could imply a further $40 trillion to $50 trillion opportunity, resulting in a total opportunity for the industry of $60 trillion to $70 trillion by 2033.”
That’s 4.5 times the size of today’s industry.
However, private investors have different requirements from institutional clients, and traditional draw-down funds “won’t meet those requirements.”
Semi-liquid funds are expected to be the products “that best meet private investors’ needs, enabling them to commit capital at much lower minimum investment levels, have some access to liquidity, and be fully invested within diversified portfolios from Day One.”
These trends are accelerating a convergence between “public and private markets, which we see happening in several ways.”
Traditional managers are converging on private markets by “building and/or buying alternative managers to offer to their institutional and retail clients. Illiquid products such as private equity are getting more liquid, while managers of public security structures are increasing their proportions of illiquid assets.”
Citi further noted that they now see “increasingly hybrid products, initially supported by manager partnerships.”
And when it comes to investor allocations, they can envision a future in which investors “don’t think of private and public allocations but rather of equity and credit allocations, each comprising both public and private assets.”
This would include a core/satellite approach, using ETFs to target certain factors in “public-market exposures, evergreens to generate core private exposures, and other active funds and drawdown funds as satellites to generate alpha.”
As they see it, managers that emerge as winners will be ones “with the best-known brands, strongest distribution networks and relationships, robust portfolio-management capabilities, a broad and deep investment network to generate consistent deal flow, and strong valuation capabilities.”
Given the significant resources required, growth via M&A and the ability to form “effective partnerships will also be critical.”
This implies that the largest managers should be “the best-positioned ones, accelerating consolidation.”
Managers less well positioned will likely “have to partner with larger peers or combine with others.”
Citi’s new research report, Global Brokers and Asset Managers: A Wealth of Opportunities, also analyzes which global alternative managers are best positioned to benefit from these trends.