Private equity M&A set to whittle sector down to 100 ‘next-generation’ firms


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The number of private market fund managers will shrink to as few as 100 over the next decade as higher interest rates, fundraising challenges and increasing regulatory costs drive a massive wave of consolidation, according to a leading European private equity firm.

David Layton, chief executive of Partners Group which oversees assets of $142bn, said private markets had entered a “new phase of maturation and consolidation”. Managers responding to fundraising pressures in more difficult economic conditions and shifting towards wealthy individual clients as a driver of new asset growth, would drive a significant rise in mergers and acquisition activity, he said in an interview.

“It is really only the large players that can withstand the forces reshaping the private markets industry. We could see the current 11,000 or so industry participants shrink to as few as 100 next-generation platforms that matter over the next decade,” said Layton.

Assets held in illiquid private market strategies stood at $12tn at the end of December, according to consultancy Preqin. The firm estimated that total private markets fundraising dropped 8.5 per cent last year to $1.5tn with net inflows into private equity managers down 7.9 per cent to $677bn in 2022.

Many smaller PE managers have found the process of attracting new business increasingly difficult. The top 25 largest competitors have captured more than a third of the $506bn of new capital allocated PE so far this year.

“There is a real bifurcation between the managers that can raise money and those that cannot. This will accelerate the process of natural selection as the industry grows in size,” said Layton.

Leading industry executives have been predicting the shifting landscape in alternative asset management. Consolidation is already happening with deals such as the acquisition this month by CVC of a majority stake in the Dutch infrastructure investor DIF Capital Partners for around €1bn in cash and shares.

Bridgepoint announced this month that it was buying Energy Capital Partners, a US-based renewables specialist, in a cash-and shares deal worth about £835mn.

Jon Moulton, the founder of UK-based Better Capital, said “massive changes” were approaching given the difficulties faced by smaller PE funds in securing support.

“Institutional investors would much prefer to make a single $1bn allocation to a large PE manager than write a stream of $100mn tickets,” said Moulton.

All PE managers also face the prospect of increased legal and compliance costs due to new US reporting requirements, a burden that will weigh disproportionately on smaller firms.

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Hugh MacArthur, global chair of Bain & Co’s private equity team said historically PE consolidation had “largely been a non-starter” because of integration problems involving culture clashes, executive pay and performance fees. However, more firms were now looking for new ways to grow assets.

“Adding asset classes to a larger platform, geographic expansion, new customer channels and strategic distribution are all means to that end. The real challenge is translating M&A into sustained organic growth,” said MacArthur.

Layton played down the prospect of Partners embarking on an M&A spree but predicted more deals between traditional asset managers looking to broaden their suite of investment capabilities and alternative investment managers that need access to bigger distribution networks.

Partners Group expects assets in private markets to reach $30tn, helped by increasing allocations by wealthy individual investors into new “evergreen” fund structures which do not have a finite lifespan.

The Switzerland-based firm also intends to offer more multi-asset class mandates that can be tailored to the needs of institutional clients.

Many PE managers secured debt on highly favourable terms during the era of ultra-low interest rates. Looming debt refinancing requirements could accelerate the consolidation process.

Increases in interest rates mean expected returns for private equity investments have dropped by around 400 basis points, according to Partners Group. This could leave private equity executives, known as general partners or GPs, facing difficult choices about their debt funded investments.

“Many of the sellers of private market assets are anchored in yesterday’s valuations while a lot of buyers are saying ‘this is a new world’ [for pricing],” said Layton.

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Lisa Holden
Lisa Holden
Lisa Holden is a news writer for LinkDaddy News. She writes health, sport, tech, and more. Some of her favorite topics include the latest trends in fitness and wellness, the best ways to use technology to improve your life, and the latest developments in medical research.

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