The private equity playbook is being rewritten.
This Bain paper is worth a read if you're in investment management or want to be in investment management.
---- Six takeaways ----
1. Fee compression: No more money machine...
"Although the '2 and 20' fee structure (2% management fee, 20% carry) is still the typical 'rack rate' for PE funds, private markets are experiencing meaningful fee pressure. Increasingly, fierce competition for capital often results in quiet fee concessions, while the growing trend toward fee-free coinvestment exerts even more downward pressure on firm economics."
"...pressure on fees is coming at a time when PE firms can least afford it."
2. Pick a side: Alpha or beta...
"Convergence raises the prospect of something entirely new for private capital: the proliferation of very large firms that charge lower fees for simply tracking the market (beta) vs. trying to beat it (alpha)."
3. Fundraising machines needed...
"Winning in this environment demands both a clearly articulated value proposition and a means to communicate it. Among other things, that requires a professionalized investor relations capability that looks more like a first-class B2B sales organization than the 'lunch and a handshake' approach of years gone by."
4. Shifting capital...
"While private equity’s traditional capital base (anchored by large institutions) will continue to expand over the next decade, two large sources will significantly outpace others: private wealth and sovereign wealth funds."
5. Private capital...
"The appeal of private wealth is simple. Individual investors hold roughly 50% of global capital. Yet those same investors represent just 16% of AUM in alternative investment funds."
"The question for alternatives managers is whether, or how soon, a similar pattern will emerge in private markets as retail capital pours in."
6. Sovereign wealth funds...
"SWFs in aggregate already control investment capital worth $6 trillion, and Bain projects that total will grow 11% annually over the next decade to $17 trillion."
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