Private markets
Dec 2024
Kobus Cronje, managing director, Guernsey at JTC, looks at the growing trends set to impact asset servicing and the private markets in the coming year
Image: JTC
A return to health for fundraising, a surging secondaries market, increasing retailisation, and the growing importance of digitalisation, are just some of the trends that are going to shape private markets and asset servicing in 2025.
Better fundraising conditions, but big managers will win the most wallet share
Expect a more stable fundraising environment in 2025, although it will be the big, established general partners (GPs) who stand to benefit the most.
Private market fundraising this year has been challenging, owing to the ongoing high interest rates, market volatility and geopolitical tensions. While private debt and real estate suffered a slight drop in fundraising, a McKinsey report shows private equity and infrastructure accumulated US$366 billion and US$51 billion respectively in the first half of 2024.
Although private equity is doing well, McKinsey noted that the industry’s fundraising is still 20 per cent shy of its 2021 peak — although that was an exceptional year.
Despite the lingering macro headwinds, the good news is that interest rates are steadily falling and the recent elections in the US and the UK have ended months of political uncertainty and speculation. This can only be a positive development for private market fundraising as we move into 2025.
In line with recent trends, the flight to size by Limited Partners (LPs) is expected to persist. The McKinsey report highlighted that the top 10 private equity funds accounted for more than 35 per cent of the aggregate capital raised so far in 2024, which is 10 per cent higher than the average of the past five years.
With investors becoming more risk-averse and less willing to bet on smaller GPs, allocations to the so-called mega managers are only going to move in one direction in 2025.
No let off in the secondaries market
The secondaries market has boomed in 2024, and we anticipate the same will continue in 2025. Experts estimate the volume of secondaries transactions to be somewhere between US$68 billion and US$72 billion for the first half of 2024.
With activity typically quieter in H1, the total value for secondaries transactions could hit anywhere between US$137-142 billion by year-end — a new record.
This beats the previous record of US$123 billion set in 2021, and is significantly higher than 2023’s figures, when total deal volumes stood at US$114 billion.
The secondaries market has been buoyant due to several factors, but mainly because of the stabilising global economy, a public market bounce-back and a challenging exit environment, caused in part by the mounting pressure on valuations.
As a result, we are seeing a lot of existing LPs — especially pension funds — who may have previously overallocated to private equity, offloading their holdings to realise liquidity.
This has created a ripe opportunity for other investors to buy-up high quality assets, often at steep discounts.
With market dynamics playing out as they are, it is entirely possible 2025 could be another record-breaking year for secondaries.
Retailisation will change the face of private markets
Retail investors show no sign of losing their appetite for private market strategies, while managers are also doubling down on their efforts to diversify their underlying client base, beyond traditional institutions.
This is only expected to accelerate in 2025.
Managers realise that retail investors are an untapped source of potential capital. According to Bain & Company calculations, worldwide assets total US$275-295 trillion, and half of it is in the hands of retail investors. Yet these allocators account for just 16 per cent of the assets under management (AUM) controlled by alternative investment funds.
For retail investors, private markets can provide them with lucrative returns, at least when benchmarked against traditional assets. For instance, data from KKR shows that the Global PE Index has outperformed the MSCI World Index by more than 500 basis points annualised on a net basis over the last 25 years.
These compelling returns are fuelling retail investor demand for new semi-liquid fund structures. Unlike the traditional private equity or private debt models, a semi-liquid fund is open ended and offers more generous redemption terms to clients.
As such, it is highly likely that products such as the EU’s European Long Term Investment Fund (ELTIF) and the UK’s Long Term Asset Fund (LTAF) will experience significant growth in 2025. In fact, this is already happening, with ELTIFs currently looking after €13.6 billion, up from €2.4 billion in 2021, and optimists are now forecasting AUM could skyrocket to €35 billion by 2026 or even €50 billion by 2028.
Tokenisation — the next big thing
Tokenisation in private markets will be another area of focus in 2025. Whereas the idea of tokenising publicly traded securities has fallen flat (mainly because public markets are already quite efficient), private markets are an altogether different story. There are several reasons for this.
As tokenisation allows for asset fractionalisation, the minimum thresholds for investing into private market funds would be much reduced.
This could lead to a wider mix of investors, such as high net worths, wealthy individuals and wealth managers, accessing private market funds and thereby driving up liquidity.
Tokenisation can also facilitate operational and transparency benefits in private markets. Smart contracts, for example, could enable better automation in the fund buying and selling process, removing the need for intermediation and manual processing.
Transparency might also be improved as transactions are recorded on a distributed ledger, often in real-time, giving investors (and regulators) better visibility into what is happening during the fund lifecycle.
A handful of providers have conducted proofs of concept (POC) exploring the tokenisation of private market funds, and such experiments will undoubtedly continue in 2025. However, expectations do need to be managed. A few years ago, a leading consultancy and a digital exchange for private markets predicted that tokenised private assets would reach US$16.1 trillion by 2030.
While this forecast seems a bit outlandish now, the market will still see positive growth in 2025, albeit less dramatic.
Towards a digital asset servicer
As private markets evolve, so too will asset servicers, and this shows no sign of letting up in 2025.
With managers running more complex strategies and increasingly winning retail mandates, fund administrators need to be capable of supporting multiple asset classes whilst also having sufficiently scalable infrastructure and technology stacks to help managers meet the reporting requirements of thousands of retail clients.
This is a huge challenge, as retail investors — many of whom are used to buying goods and services online in real-time — have high standards when it comes to all things digital, so managers and their asset servicers will need to adapt.
For asset services, this will mean leveraging disruptive technologies, such as artificial intelligence (AI) and robotic process automation (RPA) software.
JTC, for example, pilots the use of AI and RPA technologies to automate a number of existing processes, including reporting and back office administration, a move that is accelerating operational efficiencies not just at our own business, but also at our asset manager clients and their end investors.
Better fundraising conditions, but big managers will win the most wallet share
Expect a more stable fundraising environment in 2025, although it will be the big, established general partners (GPs) who stand to benefit the most.
Private market fundraising this year has been challenging, owing to the ongoing high interest rates, market volatility and geopolitical tensions. While private debt and real estate suffered a slight drop in fundraising, a McKinsey report shows private equity and infrastructure accumulated US$366 billion and US$51 billion respectively in the first half of 2024.
Although private equity is doing well, McKinsey noted that the industry’s fundraising is still 20 per cent shy of its 2021 peak — although that was an exceptional year.
Despite the lingering macro headwinds, the good news is that interest rates are steadily falling and the recent elections in the US and the UK have ended months of political uncertainty and speculation. This can only be a positive development for private market fundraising as we move into 2025.
In line with recent trends, the flight to size by Limited Partners (LPs) is expected to persist. The McKinsey report highlighted that the top 10 private equity funds accounted for more than 35 per cent of the aggregate capital raised so far in 2024, which is 10 per cent higher than the average of the past five years.
With investors becoming more risk-averse and less willing to bet on smaller GPs, allocations to the so-called mega managers are only going to move in one direction in 2025.
No let off in the secondaries market
The secondaries market has boomed in 2024, and we anticipate the same will continue in 2025. Experts estimate the volume of secondaries transactions to be somewhere between US$68 billion and US$72 billion for the first half of 2024.
With activity typically quieter in H1, the total value for secondaries transactions could hit anywhere between US$137-142 billion by year-end — a new record.
This beats the previous record of US$123 billion set in 2021, and is significantly higher than 2023’s figures, when total deal volumes stood at US$114 billion.
The secondaries market has been buoyant due to several factors, but mainly because of the stabilising global economy, a public market bounce-back and a challenging exit environment, caused in part by the mounting pressure on valuations.
As a result, we are seeing a lot of existing LPs — especially pension funds — who may have previously overallocated to private equity, offloading their holdings to realise liquidity.
This has created a ripe opportunity for other investors to buy-up high quality assets, often at steep discounts.
With market dynamics playing out as they are, it is entirely possible 2025 could be another record-breaking year for secondaries.
Retailisation will change the face of private markets
Retail investors show no sign of losing their appetite for private market strategies, while managers are also doubling down on their efforts to diversify their underlying client base, beyond traditional institutions.
This is only expected to accelerate in 2025.
Managers realise that retail investors are an untapped source of potential capital. According to Bain & Company calculations, worldwide assets total US$275-295 trillion, and half of it is in the hands of retail investors. Yet these allocators account for just 16 per cent of the assets under management (AUM) controlled by alternative investment funds.
For retail investors, private markets can provide them with lucrative returns, at least when benchmarked against traditional assets. For instance, data from KKR shows that the Global PE Index has outperformed the MSCI World Index by more than 500 basis points annualised on a net basis over the last 25 years.
These compelling returns are fuelling retail investor demand for new semi-liquid fund structures. Unlike the traditional private equity or private debt models, a semi-liquid fund is open ended and offers more generous redemption terms to clients.
As such, it is highly likely that products such as the EU’s European Long Term Investment Fund (ELTIF) and the UK’s Long Term Asset Fund (LTAF) will experience significant growth in 2025. In fact, this is already happening, with ELTIFs currently looking after €13.6 billion, up from €2.4 billion in 2021, and optimists are now forecasting AUM could skyrocket to €35 billion by 2026 or even €50 billion by 2028.
Tokenisation — the next big thing
Tokenisation in private markets will be another area of focus in 2025. Whereas the idea of tokenising publicly traded securities has fallen flat (mainly because public markets are already quite efficient), private markets are an altogether different story. There are several reasons for this.
As tokenisation allows for asset fractionalisation, the minimum thresholds for investing into private market funds would be much reduced.
This could lead to a wider mix of investors, such as high net worths, wealthy individuals and wealth managers, accessing private market funds and thereby driving up liquidity.
Tokenisation can also facilitate operational and transparency benefits in private markets. Smart contracts, for example, could enable better automation in the fund buying and selling process, removing the need for intermediation and manual processing.
Transparency might also be improved as transactions are recorded on a distributed ledger, often in real-time, giving investors (and regulators) better visibility into what is happening during the fund lifecycle.
A handful of providers have conducted proofs of concept (POC) exploring the tokenisation of private market funds, and such experiments will undoubtedly continue in 2025. However, expectations do need to be managed. A few years ago, a leading consultancy and a digital exchange for private markets predicted that tokenised private assets would reach US$16.1 trillion by 2030.
While this forecast seems a bit outlandish now, the market will still see positive growth in 2025, albeit less dramatic.
Towards a digital asset servicer
As private markets evolve, so too will asset servicers, and this shows no sign of letting up in 2025.
With managers running more complex strategies and increasingly winning retail mandates, fund administrators need to be capable of supporting multiple asset classes whilst also having sufficiently scalable infrastructure and technology stacks to help managers meet the reporting requirements of thousands of retail clients.
This is a huge challenge, as retail investors — many of whom are used to buying goods and services online in real-time — have high standards when it comes to all things digital, so managers and their asset servicers will need to adapt.
For asset services, this will mean leveraging disruptive technologies, such as artificial intelligence (AI) and robotic process automation (RPA) software.
JTC, for example, pilots the use of AI and RPA technologies to automate a number of existing processes, including reporting and back office administration, a move that is accelerating operational efficiencies not just at our own business, but also at our asset manager clients and their end investors.
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