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Private Markets and Long-term Strategic Growth

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A conversation with Daniel Trentacosta, Global Head of Private Markets and Change

Fund managers in the alternative investment management space face significant resource and cost pressures, stemming from operational, financial, and regulatory risks. Private markets have emerged as one of the fastest-growing environments in the last two decades. It’s no secret that during the last decade, the explosive growth in capital raised surpassed inflows to public holdings. In fact, according to McKinsey, total private markets assets under management (AUM) reached $11.7tn as of June 30, 2022.

AUM has now also grown at an annual rate of nearly 20% since 2017. Rebased to 100 as of December 2007, the private equity performance index is up 506.8 as of March 2023, while the S&P 500 Total Return stood at 381.2.

Danny Trentacosta, Global Head of Private Markets and Change at MUFG Investor Services, discusses how firms continue to position themselves for long-term strategic growth with investments in private markets, despite a slowdown due to macroeconomic headwinds generated by volatile markets, geopolitical conflicts, the energy crisis, and more. 

What’s driving growth in private markets? Despite the slowdown in 2022, why are firms still looking to this space for long-term expansion?
The performance of private markets has been the foundation of their success. Despite a slowdown and lagging valuations, private markets still outperformed their public counterparts. This makes them a resilient and attractive diversification tool for managers seeking to balance exposure between the two markets.

Private markets are also a hub of innovation, particularly in the tech, healthcare, and e-commerce sectors, led by entrepreneurs and disruptors looking to change the world. With the public markets’ volatility, private markets are seizing opportunities, including taking publicly traded firms private at lower valuations and extracting long-term value. Asset managers are taking advantage of these exciting opportunities by getting in on the ground floor of investments.

Additionally, private markets have held steady, making them a larger part of investment portfolios, while public markets valuations have fluctuated. 

How are inflation and rising rates impacting fund managers?
Private equity has benefited from access to cheap capital leading into this year, allowing for scaled investments. However, recent regional banking issues in the US, coupled with rising rates in the US have made borrowing more expensive or even unattainable for some companies. This has led to reduced valuations and deteriorating margins, making investment selection more critical than ever.

On the bright side, inflation and rising rates bring undervalued assets to the fore. As many banks slow down or stop lending, it creates an opportunity for private funds to step in with loans of their own.

The growth in private markets has opened new investment opportunities and uncovered new sources of risk. Do you have advice on how firms can balance capitalizing on new opportunities while maintaining robust risk controls?
Managers are expected to consistently outperform the market or index they benchmark against to meet investor demands. I’d advise managers to partner with a trusted provider and consider outsourcing their operational tasks. This would enable them to improve efficiency and reduce costs while focusing on their most important goal: generating returns for investors.

Asset management firms often use technology to aid in investment decisions, but they have not yet fully automated their middle- and back-office processes. Manual components are still involved in these processes, increasing the likelihood of potential incidents.

One way to reduce risk and capitalize on new opportunities is by outsourcing those middle- and back-office operational tasks. This way, managers can focus on their portfolios and work with a partner that continuously upgrades and reinvests in technology and attracts top talent. For example, we provide flexible, scalable, and streamlined solutions for managing complex portfolio strategies, multi-faceted fund structures, and evolving global regulations. By eliminating manual processes and automating operational tasks, we help clients to reduce risks and costs associated with middle- and back-office operations, enabling them to focus valuable resources on driving growth and new revenue.

How can fund managers stay up to date with reporting standards and regulatory requirements?
Although private markets have traditionally had fewer regulatory requirements than public markets, meeting these obligations is still crucial – the regulatory landscape is always evolving and putting new demands on private market managers to comply, and those new demands are intensifying. Investors are increasingly demanding transparency, and regulators want to understand as much as possible about private funds to help ensure their activity doesn’t negatively affect the broader markets or investors. Portfolio managers have fiduciary responsibilities to uphold but they also need to focus on running their portfolio. Having a knowledgeable partner to navigate regulatory and investor requirements is crucial in ensuring compliance with legislation and regulations while managing risk effectively. Our team of industry experts in compliance and legal provide guidance, regulatory analysis, and support for various strategies and fund structures across global jurisdictions.

Are any key private market sectors particularly popular right now — or currently not faring well? Why is this?
Private equity performance posted a negative result through September 2022 for the first time since 2008. When there is market volatility, the public and private sectors see a lot of similar activity. In such situations, investors look for quality options, and larger managers receive more investor interest. 

Real estate has outperformed inflation in six out of the last seven inflationary periods. Still, we are now starting to see a reset in property values, with higher financing costs being one of the drivers.

What key characteristics should firms consider when selecting an outsourcing partner for fund administration?
Managers should look for a partner passionately committed to understanding their unique challenges and goals. It should also have a proven track record in delivering solutions that help foster success.

When choosing an outsourcing partner for administration, it’s important to consider the stability and breadth of solutions being offered. Our parent company, Mitsubishi UFJ Financial Group, Inc (MUFG), is one of the largest banks in the world, with approximately $3tn in assets. As a result, MUFG Investor Services can offer clients an extensive, dynamic suite of products and services, including asset servicing and fund administration, banking services and finance, foreign exchange, and regulatory services. We customize solutions based on our clients’ goals and focus on gaining a deep understanding of their portfolios so we can serve as an extension of their organization.

We strive for an excellent cultural fit with our clients. This is especially important when they outsource services to us, and our teams are working closely with each other on a day-to-day basis.

By helping to manage client systems, exchanging data, and integrating with clients’ existing technologies, we provide individual –rather than pre-made – solutions by listening and collaborating to understand their needs and find the best possible solution. Our ‘open dialogue’ approach has proven to be tremendously effective. 

Selecting a reliable partner who can efficiently manage fund administration and outsourcing needs while satisfying these standards is crucial in optimizing your efficiency and resources, enabling you to provide your clients with superior service.

This article was originally featured in Preqin August 2023.