BCG Global Asset Management 2021 Jul 2021
BCG Global Asset Management 2021 Jul 2021
02 | Introduction 22 | F or Further
Reading
03 | A Snapshot of
the Industry 23 | A
bout the
Authors
17 | P
rivate Markets:
Winning the
Next Decade
Introduction
The asset management industry has emerged from the global pan-
demic in a position of strength, with assets growing by 11% in 2020
to end the year at $103 trillion. Retail portfolios, representing 41% of
global assets at $42 trillion, grew by 11% in 2020, while institutional
investments grew at a similar pace to reach $61 trillion, or 59% of the
global market. Retail investors were the main driver of net inflow,
contributing 4.4% of net new capital in 2020, twice the size of the con-
tribution made by institutional investors (2.2%).
The world’s largest asset management region, North Amer- In BCG’s 19th annual report on the global asset manage-
ica, delivered another year of double-digit growth in 2020, ment industry, we look at some of the most promising
with assets under management (AuM) increasing by 12% ways that asset managers can become private market
to reach $49 trillion. Growth was also strong in Europe investment leaders. Strategies include developing such
(10%), Asia-Pacific (11%), and the Middle East and Africa products for retail investors, gaining an edge in advanced
(12%). data and analytics, and moving to the forefront of environ-
mental, social, and governance (ESG) strategies for private
Yet across the board, profitability was largely flat in com- market portfolios.
parison with 2019, as costs and fee compression kept
operating profits hovering at around 34% of net revenues. In spotlighting private credit, we discuss the manifold
investment opportunities available in a rapidly growing
As the global crisis recedes, it is becoming increasingly asset class that currently has $1 trillion in AuM. In addi-
clear that asset managers are entering a new era that will tion, we examine the important role that asset managers
require them to adapt to new ways of doing business. On have to play in steering their insurer clients into alternative
the operations side, remote models for work and customer strategies, as well as the industry’s escalation into next-
service have emerged as permanent fixtures. To remain generation distribution.
competitive, firms must use advanced data and analytics
for every process. On the revenue side, new asset classes, The industry faces a time of unprecedented
particularly within private markets and alternatives in demands that will produce new winners and
general, will be crucial to growth during the next several losers.
years.
Asset managers that act as first movers and take advan-
These new realities present challenges but also multiple tage of growth opportunities are likely to establish a formi-
opportunities for growth. Indeed, the next big task for all dable edge well into the future.
industry players will be to carve out a suitable growth
strategy as they rethink every aspect of their business,
from client engagement to investment products.
the Industry
economic shocks and an altered state of work/life balance
that turned the world upside down. And as we begin to
envision the post-pandemic world, we can see that some
of those adjustments will permanently reshape the way
the asset management industry functions.
Exhibit 1 - 2020 Saw Double-Digit AuM Growth and Healthy Net Flows
103.1 4.0
7%
92.7
3.4
82.0 80.7 3.1 3.1
73.9
6% 65.8 68.8
0.5
2003 2009 2014 2015 2016 2017 2018 2019 2020 2003– 2008– 2014 2015 2016 2017 2018 2019 2020
2007 2013
Sources: BCG global asset management market-sizing database 2021; BCG global asset management benchmarking database 2021.
Note: Market sizing includes assets professionally managed in exchange for management fees. AuM includes captive AuM of insurance groups or
pension funds where AuM is delegated to asset management entities with fees paid. A total of 44 markets are covered globally, including offshore
AuM. For all markets whose currency is not the US dollar, we applied the end-of-year 2020 exchange rate to all years in order to synchronize current
and historic data. Values differ from those in prior studies because of fluctuations in exchange rates, revised methodology, and changes in source
data. Flow analysis is based on our global benchmarking, which includes 151 leading asset managers, representing $67 trillion AuM, or ~65% of
global AuM.
AuM ($trillions)
12%
GLOBAL 7%
11% 48.6 10%
43.2 6%
7% 22.1 23.5 25.7 6% 11%
13.5 7.7 8.5
103.1 4.3
92.7
2009 2019 2020 2009 2019 2020 2009 2019 2020
Sources: BCG global asset management market-sizing database 2021; Broadridge GMI; The Economist Intelligence Unit, Strategic Insight; Willis
Towers Watson; local organizations, including regulators; press reports; BCG analysis.
Note: Market sizing corresponds to assets sourced from each region and professionally managed in exchange for management fees. AuM includes
captive AuM of insurance groups or pension funds where AuM is delegated to asset management entities with fees paid. A total of 44 markets are
covered globally, including offshore AuM (which is not included in any region). For Canada, France, Germany, Italy, Netherlands, Switzerland, the UK,
and the US, AuM data until Q3 2020 is updated on the basis of local sources, and Q4 2020 AuM has been extrapolated on the basis of capital market
performance and characteristics of the five-year-average of historic net flow rates. For Brazil and Mainland China, AuM data until Q4 2020 is updated
on the basis of local sources. For all other markets, Q4 2020 AuM data has been extrapolated on the basis of Q4 2019 data, using capital market
performance and characteristics of the five-year-average of historic net flow rates. North America = Canada and the US; Europe = Austria, Belgium,
Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Russia,
Spain, Sweden, Switzerland, Turkey, and the UK; Asia-Pacific = Australia, Hong Kong, India, Indonesia, Japan, Mainland China, Malaysia, Singapore,
South Korea, Taiwan, and Thailand; Middle East and Africa = selected sovereign wealth funds of the region and mutual funds, plus Morocco and
South Africa; Latin America = Argentina, Brazil, Chile, Colombia, and Mexico. For all markets whose currency is not the US dollar, the end-of-year
2020 exchange rate is applied to all years to synchronize current and historical data. Values differ from those in prior studies as a result of exchange
rate fluctuations, revised methodology, and changes in source data.
For its part, the Canadian market reached a record AuM AuM in the Middle East and Africa, by contrast, rose by
level of $3.6 trillion in 2020. Unlike in 2019, its growth 12% in 2020. The key driver there was an increase in
slightly outpaced that of its southern neighbor, at 14% sovereign wealth fund (SWF) assets as global markets
versus 12%. rebounded and oil prices gradually recovered from a
steep drop in the first half of the year. Many SWFs had
Although both segments grew at roughly the same rate high equity exposure in developing and emerging mar-
throughout 2020, the Canadian market has seen gradual kets, and both of these markets fared well as financial
growth of the retail segment. Just over a decade ago, the markets bounced back.
value of retail assets in Canada was nearly 10% less than
the value of institutional assets. While the growth over
time has not led to a large shift in AuM magnitude, the Cost and Fee Pressures Cut into Profitability
rising share of the market and the increasing sophistica-
tion of retail investors present asset managers with an The global asset management industry’s profitability was
opportunity worth monitoring. largely flat in 2020 when compared to the prior year. Oper-
ating profits as a percentage of net revenues hovered at
Europe, the world’s second-largest asset management around 34%.
region, surpassed the $25 trillion mark and grew by 10% in
2020, outpacing its historical 10-year average. Overall, On the one hand, the strong market recovery after
Europe’s growth lagged behind that of most other regions, Q1 enabled players to capture positive revenue
but the top-performing individual markets—Germany, the growth of 2% on average for the year.
UK, and the Netherlands—finished the year well above the
European average. Like other industries, asset managers captured select cost
savings from developments related to the pandemic, such
In the UK, Europe’s biggest market, total AuM grew by 10% as minimized expenses for travel, personnel, and market-
during 2020 to reach more than $6 trillion, despite the ing. Even so, aggregate industry costs rose by 3% over 2019.
counterweights of Brexit uncertainty and the COVID-19 (See Exhibit 3.) Although some of the costs—for example,
crisis. higher telecommunications costs or additional investments
in remote working models—may have been temporary,
The Asian-Pacific region as a whole experienced double- costs have been rising consistently over time as asset
digit growth in 2020, with Japan and Australia—the most managers continue to invest heavily in new capabilities.
developed markets—capturing an 11% growth rate and
reaching a combined AuM level of $8.5 trillion. Developing Despite year-over-year growth, the increase in revenues was
Asia-Pacific countries grew at a similar pace of around not strong enough to offset fee compression, which persist-
11%, which is below the ten-year average, to reach $14 ed across asset classes but was most pronounced in the
trillion at the end of the year. active space. Revenues as a share of average AuM de-
creased from 25.3 basis points (bps) in 2019 to 23.7 bps in
Mainland China, the world’s second largest asset manage- 2020. The burden that asset managers face from pricing
ment market behind the US, was primarily responsible for becomes more evident when considered over the longer
the growth in developing Asia-Pacific markets. China’s AuM term: revenues as a share of AuM have fallen by 4.6 bps
grew by 10% during 2020 to reach an estimated $9.4 tril- over the past five years while costs as a share of AuM, have
lion. This growth, which excludes bank wealth manage- fallen by only 2.6 bps. (See Exhibit 4.)
ment products and trust companies, is due in large part to
retail investors, who account for 55% of AuM; these inves-
tors expanded their asset base by 18% to pass the $5 tril-
lion mark. A significant rise in mutual fund assets was a
key element in China’s retail investor growth.
NET REVENUES AS A SHARE OF AUM (BASIS POINTS) OPERATING PROFITS AS A SHARE OF NET REVENUES (%)
28
2003 2009 2014 2015 2016 2017 2018 2019 2020 26
2003 2009 2014 2015 2016 2017 2018 2019 2020 2003 2009 2014 2015 2016 2017 2018 2019 2020
Sources: BCG global asset management market-sizing database 2021; BCG global asset management benchmarking database 2021.
Note: Analysis is based on our global benchmarking, which includes 151 leading asset managers, representing $67 trillion AuM, or ~65% of global
AuM. This sample is weighted toward more traditional players and does not include pure alternative players, so those economics are not comparable
with total asset management revenues based on our global product trend analysis. For values with fixed exchange rates, the year-end 2020 US dollar
exchange rate has been applied to all past years to synchronize current and historic data. Historic data has been restated to maintain consistency of
samples over time. Net revenues are management fees minus distribution costs.
$32 $46 $93 $103 $136 $112 $163 $315 $331 $437
9/$3 14 13/$6 9 15/$14 11 15/$15 16/$22
8
27/$30
13 39/$63
22/$7 7 8 42/$132 6 42/$140 8
23/$11 19/$17 18/$19 46/$202
9 4 17/$23
5
7/$2
16 14/$15
13/$6 15/$14 15/$21 25/$28
9 8 7
5
23/$37 19/$61 19/$61
6/$6 5 1 4 17/$75
26/$36 13
3/$29 31/$32 2 8/$13
53/$17 1 5 11 12 7 13/$43
39/$18 13/$41
6 13/$59
39/$43 0
26/$43 4 20/$62 20/$65
4 2 16/$70
25/$34
20/$19 17 21/$22 9
9/$3 12 12/$6 13
3/$4 4/$6 6/$19 11 6/$21 8 7/$31
10 11
2003 2009 2019 2020 2025E 2003 2009 2019 2020 2025E
Passive Active core4 Solutions/LDI/balanced3 Active specialties2 Alternatives1 CAGR %/annual growth
Sources: BCG global asset management market-sizing database 2021; BCG global asset management benchmarking database 2021; Broadridge
GMI; Strategic Insight; P&I; ICI; Preqin; HFR; INREV; BCG analysis.
Note: Compared to previous years, an improved methodology for allocating of global AuM across traditional product classes is based on input from
Broadridge GMI. Because of rounding, not all bar totals add up to 100% or to the specified sum. LDI = liability-driven investment.
1
Includes hedge funds, private equity, real estate, infrastructure, commodities, private debt, and liquid alternative mutual funds (such as absolute
return, long and short, market-neutral, and trading-oriented); private equity and hedge fund revenues do not include performance fees.
2
Includes equity specialties (foreign, global, emerging markets, small and mid-cap, and themes) and fixed-income specialties (emerging markets,
high-yield, flexible, inflation-linked, and structured finance - asset-backed securities).
3
Includes target-date, target maturity, liability-driven, OCIO, multi-asset balanced, and multi-asset allocation.
4
Includes actively managed domestic large-cap equity, domestic government and corporate debt, money market, and structured products.
Although we expect passive investments to be the fastest- No two winning asset managers look exactly alike. Effective
growing assets class over the next five years, expanding by products, strong distribution arrangements, a best-in-class
9% annually, the revenue story is different. Passive revenue operating model, and harmonized human capital are key
as a share of the global asset management industry’s total elements, but multiple combinations of these pieces can
revenue remained largely the same from 2019 through yield a winning business model.
2020, at around 6%. We expect passive products to main-
tain a similar revenue share over the next several years, Product Manufacturing. Asset managers that generate
an indication of the already depressed pricing in this low- a true edge in product performance have a unique advan-
margin product category. tage. Their business model usually includes strong sales
and marketing teams that can readily explain the value
The AuM for solutions grew by 8% in 2020. proposition to clients. In the institutional space, these
asset managers usually offer products designed to meet
Although these products reached a peak from 2003 to specific client needs such as liability matching or risk
2009, when AuM nearly doubled, the solutions arena still mitigation. Increasingly, however, retail managers are also
presents opportunities for institutionally oriented asset creating their own customized offerings, especially when it
managers, and we expect flows to remain strong. Custom- comes to ESG products, thematic ETFs, direct indexing,
ized solution products such as liability-driven investment and separately managed accounts at scale.
(LDI) are in demand from pension plans and other institu-
tional clients that want to hedge interest rate exposure, Asset managers seeking to excel at product performance
reassess portfolio glide paths, and ensure adequate liquidi- cannot afford to overlook alternative assets as a growth
ty to meet payments or outflows. Outsourced chief invest- opportunity, given the category’s strong performance out-
ment officer solutions remain in demand, too, especially look and likelihood of becoming a feasible option for retail
from asset owners seeking even more complete solutions investors. Becoming a player in this category, however, will
to navigating and addressing the uncertain future of the require a rigorous effort to determine whether the best
market. route forward is to build the team organically, set up a
partnership, or gain the capabilities through an acquisition.
Select alternative asset classes experienced muted growth
in 2020, but the alternatives product category as a whole Value for Money. Another winning combination consists
remained robust, growing at 11% for the year. Alternatives of good performance and good value for the money. Most
represent the largest revenue pool for asset managers capital flows go to funds with Morningstar ratings of three
globally, capturing more than 40% of all revenues across stars or more, with at- or below-average pricing. Firms need
the industry despite representing only 15% of global AuM. to offer strong products and then work closely with the
Private equity (PE) had another strong year, with asset investment consultant community, as well as with the
growth exceeding 20% after a resounding recovery from home offices of intermediaries, to ensure that their prod-
the downturn in the first half of 2020. PE can be a spring- ucts are available at a time when supply is shrinking.
board for continued economic recovery, bringing invest-
ment and growth to some of the sectors that the pan Strong Distribution, Powered by Technology. Distribu-
demic hit hardest. tion is currently undergoing a rapid transformation to
digital. (See the sidebar “Next-Generation Distribution:
We believe that PE will continue to be the fastest growing People and Machines.”) A number of players have shown
alternative asset class over the next five years, as the over- their strength in this side of the business, and those in the
all universe of alternatives increases its share of both lead share several key elements.
global AuM and revenue. (See Exhibit 6.) This is happening
in response to market realities and regulatory change, First, they recognize that retention is critical to continued
presenting asset managers and other asset owners with a growth, so they energetically protect their existing book.
prime opportunity to capture growth, along with the chal- Second, they put a lot of thought into the issue of where
lenge of developing the necessary expertise. (See the next best to apply technology, data, and analytics. Asset manag-
chapter, “Private Markets: Winning the Next Decade,” and ers with an intermediary business recognize that their
the sidebar “How Asset Managers Can Deliver Alternatives success may hinge on talent retention and tech-driven
to Insurance Clients.”) advisor enablement. Finally, they invest time and money in
building and maintaining brand strength, a quality that
becomes particularly important in times of crisis.
20
Sources: BCG global asset management market-sizing database 2021; BCG global asset management benchmarking 2021; Broadridge GMI; Strate-
gic Insight; P&I; ICI; Preqin; HFR; INREV; BCG analysis.
Note: Compared to previous years, an improved methodology for allocating of global AuM across traditional product classes is based on input from
Broadridge GMI; ETF = exchange-traded fund; LDI = liability-driven investment.
1
Include foreign, global, emerging-market equities, small and mid caps, and themes.
2
Include emerging markets, high-yield, flexible, inflation-linked and structured finance – ABS.
3
Include target date funds, target maturity and OCIO.
4
Include absolute return, long/short, market neutral, & trading-oriented mutual funds.
5
Include actively managed domestic large-cap equity.
6
Include actively managed domestic government and corporate debt.
7
Management fees net of distribution costs.
A Fit-for-Purpose Operating Model. In the past, most Win with Talent. Attracting the best talent has always
asset managers looked to their front office to build a suc- been critical to attaining the best outcomes. Today, how
cessful business. More recently, however, some players ever, the “how” is much more variable than it used to be.
have gained significant competitive advantage by redesign- COVID-19 has transformed how people work and, more
ing their operating model. importantly, how people prefer to work. In response, asset
managers need to offer flexible ways of working to attract
One common strategy has been to build a business that is the top-notch, diverse talent they’ll need in an era when
scalable, cost efficient, and able to respond quickly to much of the work will occur offsite.
changes such as new product launches and new regula-
tions. The operating model emphasizes technological The sweet spot will remain a moving target as the asset
efficiencies, tech-led asset allocation tools, sophisticated management industry transforms to meet a future that is
data and visualization systems, alternative data sources, full of uncertainties. Firms that combine their strongest
and a streamlined back office. Many managers have cho- existing capabilities with the innovations they’ll need for
sen to operate in an ecosystem of partnerships in which tomorrow will have the best shot at winning.
partners provide technology and operations functions at a
fraction of what it would cost to do it alone. This approach
allows the asset managers to focus on managing money,
clients, and risk.
Insurers, like other investors, find themselves under in- Nevertheless, it is not always easy for insurers to imple-
creasing pressure to deliver higher yields. Low interest ment an alternatives strategy. First, the high capital re-
rates have cut into their product margins, particularly in quirements can be daunting: in certain regimes insurers
the case of spread products with long-term guarantees. must maintain liquid reserves as high as 50% of portfolio
assets. Second, insurers often lack the internal expertise
As insurers search for desirable investment targets, alter- to manage alternatives, so they need to work with third-
native investments could be an ideal match. Alternatives party managers that are compatible with their statutory
managers are eager to attract permanent capital, and requirements.
insurers are accustomed to holding many of their assets
to maturity to match their highly stable liabilities, which
puts them in a good position to take on the illiquidity
premiums.
Insurers are liability-driven investors and often Developing an advisory mindset and the skills to go with it
differentiate their investment strategy according requires a long-term commitment to a new investment
to the nature of their business. paradigm, as well as a new approach to the investor rela-
tionship. Yet this is where the best opportunities for growth
For example, UK annuity providers often prefer to invest lie—and once insurers take the initial plunge, they are
directly in individual loans with specific lending features likely to stick with alternative allocations. Asset managers
that enable them to precisely match their own liability who understand their insurer clients’ needs and become
duration profile. By doing so, they can earn an illiquidity leaders in designing customized alternative solutions will
premium without exceeding their particular risk tolerance be able to ride a growth wave well into the future.
limits. Continental European life insurers are happy to
invest indirectly in certain alternatives—especially private
debt or infrastructure—through managed funds, as long as
the average credit rating and duration of the funds’ assets
fulfill the requirements specified by their risk management
and investment policies. Asset managers must understand
their clients’ different market practices and investment
philosophies in order to design tailored offerings.
The 2020 pandemic forced asset managers to accelerate advisors with similar profiles—similar to Amazon product
transformation throughout their business, but nowhere has recommendations.
change been more of a priority than in the distribution
function. The next generation of distribution will combine In a survey that BCG conducted in partnership with IMEA
advanced digital capabilities with the human touch. (See in 2021, asset management distribution leaders represent-
Exhibit A.) As one asset management executive told us: ing a combined $10 trillion in AuM confirmed that the
“Overnight, everyone became a hybrid.” events of 2020 had significantly accelerated both the in-
vestment and the attention required to achieve next-
The transformation goes well beyond videoconferencing, generation digital distribution capabilities.
which has clearly become part of the new normal, to ad-
dress more fundamental questions about improving dis Before last year, 75% of firms said that they were using
tribution outcomes through the use of data, advanced digital distribution capabilities with no more than 25% of
analytics, and technology at scale. For example, an asset their clients. Today, 75% of firms report using digital distri-
manager might use rich data signals to predict with 90% bution capabilities with at least 25% of their clients. Fully
confidence that a financial advisor is likely to request a one-third of firms are using them with 50% to 75% of their
redemption. The manager can then deploy a sales repre- clients. In addition, 54% of firms are creating “primarily
sentative at the right time to redirect the potential outflow digital” segments to serve clients with limited in-person
into a product that better meets the financial advisor’s interaction.
needs, based on what products are attractive to other
The digital transition has commanded the attention of quently, the firm must focus on change management from
C-suite leadership. In our survey, 95% of distribution lead- the start to get it right. Asset managers should consider a
ers said that improving digital distribution capabilities is range of initiatives, including embedding frontline teams in
now a “top of house priority.” The value at stake is high. the design process, providing formal training, rewarding
Firms are targeting a revenue lift of up to 10% from their and promoting early adopters, and designing pilot pro-
digital initiatives, in addition to cost savings from greater grams to introduce and test the new system.
efficiency in resource redeployment.
Next-generation capabilities will have a profound effect on
With recent advances in data quality and analytical capa- the traditional distribution operating model. Imagine a
bilities, such as machine learning and natural language world in which a client taps into an app that explains, in
processing, the achievements gained from digital distribu- plain text, which actions to take and why—and then, with
tion have been impressive. Asset managers have been able the click of a button, deploys a vast array of personalized
to reduce redemptions by 5% to 10% through predictive content or schedules a meeting with a product specialist.
modeling and targeted interventions. Internal sales team All of this is possible today.
cross-selling has increased by 20% through the use of
smart targeting product recommendations. By hyper These new digital capabilities will force asset managers to
personalizing content delivery, firms have improved their address a battery of questions and in many cases to recon-
engagement metrics, tripling their previous email-open sider their existing business model. What kinds of talent
rates and doubling their previous click-through rates. (See do they need in the digital world? How many people? Do
Exhibit B.) traditional regional structures still make sense? What is
the difference between sales and marketing?
Best of all, asset managers can achieve these
results in months, not years, by using lightweight The transformation must be rapid and all-encompassing.
data and technology stacks and off-the-shelf Everyone throughout the organization must be willing to
components, which reduce the need for multiyear work outside the legacy systems—a requirement that often
transition programs. meets with resistance that slows progress. Firms that move
quickly will create a formidable relationship edge with their
Ultimately, though, the effectiveness of distribution trans- clients, however, and second movers will find that edge
formation depends on the willingness of the sales and difficult to overcome.
marketing teams to adopt the program at scale. Conse-
CUSTOMER
Markets
annually to reach nearly $8 trillion as of September 2020,
with global assets concentrated in private equity, real
estate, private credit, infrastructure, and natural resources.
(See Exhibit 7.) We believe that AuM growth will continue
and could accelerate, particularly as retail money increas-
Winning the Next Decade ingly flows into private markets. The effects on the asset
management industry will be profound as new competitive
dynamics, partnerships, and M&A activity ensue between
incumbent private market specialists and traditional asset
managers that are the historical gatekeepers of the retail
channel.
2% 1% 1% 3% 2%
Other
7%
Europe 20% 18% 22% 5%
35%
12% 6%
Asia and Australia 26%
20%
86%
69% 71%
North America 52%
42%
Three Winning Plays in Private Markets Many industry leaders have argued that it’s time to de-
mocratize private markets for everyday retail investors. In
We see the potential for big wins in private markets, espe- 2020, regulations started to move in that direction, as the
cially for firms that compete most effectively in any of US Department of Labor issued an information letter
three key areas: serving the retail market, using data and supporting private equity investments in defined contribu-
analytics to enhance decision making, or integrating mean- tion (DC) plans. DC plans are often categorized as institu-
ingful ESG metrics. Each of these areas deserves close tional because of the plan sponsor’s influence in setting
attention. the menu of investment choices, but in many cases indi-
viduals can pick their funds—and in a big step forward, it is
Catching the Next Wave in Retail now permissible to include private equity as a choice. The
Historically, private markets have been the purview of Department of Labor’s recommendations have prompted
institutional investors such as sovereign wealth funds, several large traditional asset managers to work on making
pension plans, endowments, and foundations. These insti- these assets more widely available.
tutions have consistently increased their allocations to
private markets in their search for yield. With interest rates At the same time, investor education must be a top prior-
likely to remain low for the foreseeable future, we see no ity. Retail investors and their advisors need to understand
signs of this force slowing down; in fact, many institutional that, along with their potential for higher returns, private
investors report that they are below their target allocation market assets carry a longer lockup period and a higher
for private assets. risk profile than public market assets. The spread be-
tween a top-quartile private market fund manager and a
However, we believe the next big wave is likely to come bottom-quartile one can be 1,000 bps or more, compared
from retail investors, who have largely remained on the to around 100 to 300 bps for active equity funds. Our
sidelines as private markets have expanded. For a sense of analysis has shown that only 20% to 30% of private mar-
the magnitude of this potential investor base, consider that ket managers can maintain top-quartile performance
US retail investors hold about 50% of total AuM across all over ten years, highlighting the importance of fund man-
public market asset classes but only 10% of AuM in private ager selection.
market asset classes. On average, retail investors currently
have 1% to 5% of their overall portfolio allocation in private As efforts to serve the retail base pick up, we anticipate
markets, whereas institutional investors have 10% to 15% that there will be a race among asset managers to solidify
allocated there. Even a small percentage increase in retail manufacturing and distribution capabilities in the private
investor allocations could have a substantial impact. markets. The challenge in manufacturing is that sourcing
Spotlight on Private Credit As players search for loan volumes to satisfy growing de-
mand from institutional and retail investors, we expect the
Asset managers seeking opportunities in alternatives would lines to blur further. Private credit firms are moving up the
do well to look at private credit, an area that is growing in credit spectrum and further into traditional banking terri-
both capital flows and deal volume. Over the past ten years, tory, while lower, middle, and upper market firms are likely
investors have allocated $1 trillion to the space. Demand to converge mostly through M&A. (See Exhibit 8.)
has come primarily from institutional investors that want
the extra yield premium relative to liquid credit alternatives Although private credit investment firms compete in differ-
and can manage the longer-term capital lockup, but the ent areas, the basis for competitive advantage is fairly
retail segment is gaining momentum. consistent across the industry. All firms compete on loan
origination, speed and flexibility of execution, and integrat-
The US dominates private credit activity, accounting for ed banking capabilities.
about 70% of the market. Roughly 70% of US private credit
activity is sponsor-backed as a component of a private Given the ticket sizes of private debt and the relatively
equity deal, with the remaining 30% coming from more short hold windows—three years on average—maintaining
traditional commercial lending directly to private compa- a steady flow of investable loan volume is the lifeblood of
nies. About two-thirds of all US private credit goes into private debt firms, especially pure-play direct-lending firms.
buyout or growth capital, more or less evenly distributed The largest players will employ 25 to 50 professionals whose
across five core industries: technology, consumer goods, sole job is to build relationships with sponsors and to be
health care, industrials, and business services. the first call for deal origination. The coverage models re
semble a world-class investor relations function, with tight
This broad umbrella of activity covers six main subseg- relationships at multiple levels of the sponsor’s decision-
ments of private credit, which vary by risk and ticket size: making hierarchy. The largest players might look at 2,000
deals a year to identify the 200 that they want to invest in,
• The lower end of the middle market consists large- so keeping the top of the funnel full is critical.
ly of players that focus on low-risk senior tranches. In
select cases, however, they are beginning to move into Disciplined process and technology play a key role
the mixed interest rate structure of unitranche debt in in ensuring speed and flexibility of execution.
competition with the core players.
Some players use machine learning tools to evaluate the
• The core middle market increasingly looks to uni- merits of an opportunity. Following the initial triage, more
tranche deals to fulfill multiple mandates and to access promising deals receive a closer look, mirroring a private
greater deal flow by simplifying the borrowing process equity-style due diligence process with in-depth research
for sponsors. and internal investment committee processes. Increasing-
ly, as the needs of sponsors have evolved, there is a premi-
um on flexible lending practices, with sponsors seeking
deals at multiple levels of the credit stack—senior, mezza-
nine, and unitranche.
Strategy
Direct lending
Distressed/special
situations
Opportunistic
Specialty finance
$3 million–$25 million $25 million–$75 million $75 million–$100 million $100 million+
LPs are also seeking managers that can give them expo- Firms that are winning in private debt have fine-tuned all
sure to different risk profiles, preferring two to three part- three of these levers to suit their circumstances. For exam-
nerships that can “cover the waterfront.” We expect to see ple, using technology to originate new loans at scale is
this trend play out across private markets more broadly. more important for a lower middle market player than for
Increasingly, private credit managers such as private equity an upper middle market firm that has relationships with
sponsors are asking tougher questions and demanding larger private equity general partners. Increasingly, poten-
access to ESG data at the execution stage. tial clients—both institutional and retail—are looking for
differentiated and focused capabilities to give them confi-
Private equity sponsors are also looking to private credit dence that their money is in good hands.
players to deliver a broader range of traditional banking
services to their portfolio companies. Such services may Asset managers looking to capture growth opportunities
range from foreign exchange hedging to research and IP would do well to determine how they can gain an edge in
sharing to risk management services. private markets and then build strategies that will enable
them to continue to adapt to the demands of these
Many leading players are leaning heavily into data and markets.
technology to monitor the underlying credit health of their
portfolio companies, connecting application program
interface plug-ins into their general ledger accounting
systems, which in turn become a useful source of insight
for the private equity sponsor. As these value-added ser-
vices expand, we expect natural moats to form around
private debt providers, making it more and more difficult
for traditional commercial lenders to compete with them.
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Simon Bartletta is a managing director and senior part- Neil Pardasani is a managing director and senior partner
ner in the firm’s Boston office. You may contact him by in the firm’s Los Angeles office. You may contact him by
email at [email protected]. email at [email protected].
Joe Carrubba is a managing director and partner in Kedra Newsom Reeves is a managing director and
BCG’s New York office. You may contact him by email at partner in BCG’s Chicago office. You may contact her by
[email protected]. email at [email protected].
Dean Frankle is a managing director and partner in the Thomas Schulte is a managing director and partner in
firm’s London office. You may contact him by email at the firm’s Düsseldorf office. You may contact him by email
[email protected]. at [email protected].
Chris McIntyre is a managing director and partner in Ben Sheridan is a managing director and partner in
BCG’s New York office. You may contact him by email at BCG’s Singapore office. You may contact him by email at
[email protected]. [email protected].
The authors thank the asset management institutions If you would like to discuss this report, please contact the
participating in the research and benchmarking that made authors.
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