Private assets cushion managers' public pain

The global feast money managers enjoyed in 2021 turned to famine last year as inflation spiked and central banks tightened, with private markets firms the lone players to emerge unscathed.

According to Pensions & Investments' latest annual survey of the largest money managers, worldwide institutional assets overseen by 434 managers around the globe plunged 15.6% to $50.37 trillion in 2022, more than offsetting the prior year's 6.3% gain.

U.S. institutional tax-exempt assets fared marginally better, dropping 15.3% to $19.07 trillion, while the broadest measure of money manager scale — total worldwide assets — did worse, declining 16.6% to $77.45 trillion.

Last year's abrupt shift from extraordinary monetary policy stimulus to a rate hiking pace unseen in decades sent equity and bond prices reeling, betraying investors' hopes that a portfolio balanced between the two could rely on one to wax when the other waned.

Unsurprisingly for a year where the S&P 500 dropped 18% and the Bloomberg U.S. Aggregate Bond index fell 13%, managers reported painful declines in assets under management for both capital markets pillars — with higher-margin active assets dropping more than passive.

Over 2022, money managers' active U.S. equity assets managed internally for U.S. institutional tax-exempt investors plunged 23.4% to $2.38 trillion, while passive assets fell by just under half that pace, dropping 11.3% to $4.14 trillion. Active U.S. fixed income, meanwhile, declined 14.4% to $3.26 trillion, while passive dropped 10.7% to $949 billion.

The volatility did little to alter the latest rankings. BlackRock Inc. remained king of the hill with total worldwide assets of $8.59 trillion, down 14.1% on year, followed by Vanguard Group Inc., off 14.3% to $7.25 trillion; Fidelity Investments, down 13.7% to $3.66 trillion and State Street Global Advisors, off 15.9% to $3.48 trillion. The rest of the top 10 all stayed within one or two positions of their year-earlier rankings.

The ranks of the 10 largest managers by total worldwide institutional AUM were similarly stable with one major exception: Vanguard Group, the perennial runner-up to BlackRock in that category, finally claimed the top spot with a 7.1% decline to $5.02 trillion. BlackRock tumbled 15.1% to $4.83 trillion. The next three AUM leaders remained in place, with SSGA off 16.9% to $2.41 trillion; Fidelity down 14.8% to $1.73 trillion and BNY Mellon Investment Management dropping 25.9% to $1.45 trillion. Among the top 10, only Goldman Sachs Group reported a rise in assets, up 5.9% to $1.44 trillion, on the back of its acquisition last year of The Hague, Netherlands-based NN Investment Partners. That inorganic AUM gain of more than $300 billion lifted Goldman to sixth place from ninth the year before.

But if hard times were the order of the day for 2022, managers of private market assets didn't get the news, reporting continued asset gains for segments such as real estate, venture capital, infrastructure, private equity and private credit.

Brookfield Asset Management, a Toronto-based manager of infrastructure, private equity, real estate and credit, rose to 26th place with $666.1 billion in total worldwide AUM from 40th place in 2021, while New York-based KKR & Co. advanced to 37th place from 45th and Ares Management Corp., a Los Angeles-based real estate, private equity and credit firm, jumped to 45th place from 60th.

Whether the resilience shown by those market segments will leave money management executives as eager to diversify into private markets as their institutional clients in recent years is an open question.

According to some analysts, they should be.

The end of extraordinary monetary policy stimulus, which helped money managers absorb rising costs, falling fees and surging demand for passive strategies over the past decade, will force the industry to look to high-margin private market strategies for the revenue growth previously driven by an ever-rising tide of asset prices, said Chris McIntyre, New York-based managing director and partner with Boston Consulting Group.

A recent BCG report on the industry tied roughly 90% of money manager revenue growth over the past decade to the "second order consequences" of the central bank's efforts to levitate markets through the global financial crisis and the pandemic downturn.

Absent that tailwind, money managers will need to restructure their businesses going forward to garner at least a third of their revenues from private market strategies, he said.

Market participants point to Franklin Templeton's recent move to acquire Boston-based Putnam Investments – adding scale to counter the fee and cost pressures facing active managers of stocks and bonds — as a sign of the times.

If the push to add private markets capabilities is well underway, the resilience those market segments enjoyed in 2022 could provide added momentum.

"As a result of last year, some of the people who maybe had their head in the sand … or sort of resisted (moving into private markets) are going to be forced to look at some of these other things," said R. Bruce Cameron, partner and co-founder of Berkshire Global Advisors, a New York-based investment bank focused on the global money management industry.

Shifting a 60% equity/40% bond mix to a 50% equity, 30% bond, 20% private markets mix is the likely course of action for investment managers thinking about how to diversify their businesses going forward, agreed John Delaney, a Philadelphia-based portfolio manager with Willis Towers Watson PLC.

Some money managers say they've either cleared BCG's 30% hurdle or are close to doing so.

"I would say we're in that ballpark," said Mike Perry, head of global client group and global product with Chicago-based Nuveen, which rose one position to 18th place for total worldwide AUM in the latest rankings with a 13.6% decline to $1.09 trillion. Having about $250 billion in less-volatile private market assets such as private credit, real estate and farmland helped Nuveen's book of business remain relatively resilient last year, he said.

Christine Hurtsellers, CEO of Atlanta-based Voya Investment Management, said her firm is "already there ... with about a third of our assets in privates and more than that in terms of revenue." Voya climbed to 48th place in the latest survey on the back of a 15% gain in AUM to $343.4 billion from 61st place the year before, powered by the acquisition of Allianz Global Investor's U.S.-based equity and private placement investment teams, with combined assets of roughly $100 billion, in exchange for a 24.9% stake in Voya.

Goldman Sachs Asset Management is moving in that direction, with more than 20% of its revenues coming from alternatives in the quarter ended March 31, said a GSAM spokeswoman.

That, in turn, reflects the continued focus of GSAM's clients — whether sovereign wealth funds, financial institutions, public pension plans, endowments and foundations, individuals or family offices — on private markets as an unusual source of uncorrelated, diversified returns, said J. Christopher Kojima, partner and co-head of client solutions group at New York-based GSAM.

Mr. Kojima said GSAM takes a solutions approach, rather than a product-focused approach, to meet those client needs, bringing diversified, scaled capabilities across "private equity, private credit, secondaries, GP stakes, growth equity, real estate (and) infrastructure" to the table to serve institutional clients looking now to partner with ever fewer providers.

As of Dec. 31, private markets assets accounted for $260 billion of GSAM's $2.55 trillion in total worldwide assets, with a record $72 billion in commitments for the year and another $14 billion for the quarter ended March 31, the spokeswoman confirmed.

Others remain at an earlier stage of their private markets journey, including Federated Hermes Inc., which rose to 25th place from 32nd on the back of strong money market fund inflows that left the Pittsburgh-based firm's worldwide institutional AUM roughly flat at $618 billion.

Federated's 2018 acquisition of London-based Hermes Investment Management, with $47.2 billion in AUM including private equity assets, started the firm on the road to building a private markets business that could make a significant contribution to Federated's revenues, said J. Christopher Donahue, chairman, president and CEO of Federated Hermes.

Currently, with Federated's $21 billion in real estate and private equity assets accounting for 10% of the firm's revenues, it's starting "to move the dial," said Mr. Donahue, offering "wonderful diversification" for a business that had been balanced among money market, equity and bond assets. With private markets accounting for more than half of Federated's current mandate pipeline of $4.8 billion, that high-margin segment of the business is poised for continued growth, he said.

Meanwhile, Scott Couto, head of North American at Columbia Threadneedle Investments, which fell to 30th place from 25th with a 22.6% decline to $585.2 billion in global AUM, said his firm is moving to meet growing demand for private market exposures not just from institutional clients but from the wealth management side as well. Every big wealth management firm Columbia Threadneedle's team has met with recently said their clients were looking to lift alternatives allocations to between 15% and 20% of their portfolios from 5% at present, focusing "our efforts around bringing some of these alternative return streams in the North America wealth market," he said, adding "you should watch for what we do there."

Boston Consulting Group's Mr. McIntyre said at present hardly any traditional managers are getting a material revenue contribution from private markets. Among the top 50, "you can list them on one hand, probably," he said.

But despite agreement that firms focusing on actively managed equities and bonds are facing, on balance, a tougher environment going forward, a number of managers insist they have the culture and investment chops to make those asset classes the cornerstone of successful businesses for decades to come.

"Profitability was down for asset managers last year and we weren't immune to that," said Michael W. Roberge, chairman and CEO of Boston-based MFS Investment Management, which saw total and institutional AUM each decline 21% $547.6 billion and $186.3 billion, respectively. "But our perspective on it is, hopefully clients give us their money to manage over 10 years and we're not going to overreact" to short-term developments.

Baillie Gifford, an Edinburgh-based manager of global equities, saw its total and institutional AUM plunge 41% to $268.7 billion and $216 billion, respectively, the sharpest decline among P&I's top 100 ranked managers and falling to 51st from 37th on the institutional rankings. It likewise is culturally predisposed not to overreact to any short-term development, said Scott Nisbet, partner and head of global strategy for the more than 110-year-old firm.

A year "happens to be the time it takes the Earth to revolve around the sun. That's it," noted Mr. Nisbet. "If you look to just 2022 and say 'Oh my God, we need to change everything,' that is rarely the right thing to do in investing and probably means you end up doing exactly the wrong thing at exactly the wrong time," he said.

Instead, active management should continue to reward managers who deliver benchmark-beating returns over the long term, and the competitive backdrop has become more conducive for doing so since last year, those executives say.

Following a decade or more of a rising tide lifting all boats, the environment of higher inflation and higher dispersion that's likely to prevail over the coming five to 10 years should be better suited to active management, and as long as MFS continues to deliver value for clients over the long term, it will stay relevant, Mr. Roberge said.

"Active management is alive and kicking," agreed George Gatch, CEO of J.P. Morgan Asset Management. To the extent tighter financial market conditions pressure managers to devote fewer resources to their active capabilities, the more opportunities JPMAM's global army of 300 equity and credit analysts will have to exploit market inefficiencies on behalf of clients, he said.

JPMAM's private markets AUM topped $200 billion last year but the firm's publicly traded equity business remained vibrant as well, with $25 billion in active equity inflows for the year and a further $19 billion for the quarter ended March 31, as well as strong demand for newer offerings such as active exchange-traded funds, Mr. Gatch said.

Baillie Gifford, meanwhile, began dipping its toes into private market waters just over a decade ago when it made an investment in Hangzhou-based Alibaba Group roughly two years before that now giant company went public.

"We've been running a little bit of money in private equities in the last few years … very much an extension of the skill set of being long term, not being risk averse, going for home runs, accepting mistakes, and the kind of investment culture we have for equities we think translates very nicely to private companies," Mr. Nisbet said. Still, the company's business remains 95% focused on global growth equities, he said.

BCG's Mr. McIntyre said he expects traditional firms to embrace private markets more passionately going forward. "Most of what we see people doing today is buying little companies, like they're experimenting. I think in five years, you're going to have traditional and you're going to have what used to be called 'alternative' and they're going to be the same thing … they're going to be integrated," he said.

T. Rowe Price Group Inc., the Baltimore-based active equity heavyweight that ranked 15th in P&I's latest tally with $1.27 trillion, down 22% from the year before when it ranked 13th, could be one example of what that integration could look like.

Robert Higginbotham, T. Rowe's head of global distribution who also oversees the firm's global product group and brand marketing, noted that in addition to T. Rowe's acquisition just over a year ago of Oak Hill Advisors — a New York-based private credit shop with more than $50 billion in assets — the firm has less visible but still quite significant private equity exposure.

"We're actually one of the larger managers in private equity," Mr. Higginbotham said. "We just tend to embed it, not as a stand-alone, but embed it in the products that we offer to clients, particularly in our small- and midcap strategies," he said, calling it "one of the best kept secrets in asset management."

T. Rowe Price was the 17th largest global institutional manager, with $737.5 billion in AUM down 18% last year.

Meanwhile, another P&I survey result — a hefty 12.6% jump in global head count to 645,309 — suggests money managers continued to take a long view of their businesses amid last year's capital markets fireworks.

George Walker, chairman and CEO of New York-based Neuberger Berman, which climbed to 43rd place from 47th place on the back of a relatively modest 7.2% drop in AUM to $427.3 billion, said his firm is looking to play offense by adding investment talent at a time when many firms will likely be squeezed by rising costs and falling revenues.

Neuberger added 248 people in 2022, a 10% increase over 2021, following a 7% increase the year before, said Mr. Walker, adding that current plans call for a further 6% increase for the current year.

The bigger issue, said Mr. Walker, is "there are a lot of firms out there that had negative flows," which had been offset for years by rising markets.

Now, with markets down, those competitors face a "real problem," likely to force many competitors to cut costs, exit non-core businesses, reduce research investment as well as their footprint "and I'm gonna instead do the opposite," he said.

Baillie Gifford's Mr. Nisbet likewise pointed to periods of stress such as 2022 and 2008 as some of the best opportunities to invest in new talent. The global financial crisis was "a great time to be recruiting … people were getting chucked out of investment management firms left, right and center in this panic to reduce costs." Baillie Gifford "did quite a lot of hiring" in 2022, he said.

Private asset resilience in a wretched year for stocks and bonds leaves money managers rethinking how much exposure they should have.