The Economist February 26th 2022 Special report Private markets 7similar. Blackstone is taking minority investments in insurers in
exchange for exclusive asset-management arrangements. Last
summer it bought 10% of aig’s Life and Retirement business for
$2.2bn. In return, Blackstone gets a long-term agreement to man-
age$50bnofaigassets.
Publicplayers’privatepassion
As alternative asset managers grow less alternative, mainstream
managers are getting more so. Nudged by clients in search of
yield, they are looking to cash in on private-market strategies.
They would also welcome the chance to charge higher fees, having
seen those from conventional stock funds shrivel with the rise of
passive investing.
Private markets were the busiest area of dealmaking for big
mutual-fund firms in 2021. Franklin Templeton paid $1.8bn for
Lexington Partners, which has raised more than $55bn for alterna-
tive strategies. It also hired Ben Meng, a former investment officer
of a Chinese state agency which manages $3trn, to lead a push into
Asia. T. Rowe Price splashed out $4.2bn for Oak Hill Advisors, a
private-credit specialist. “They bring products our clients want,
and we bring distribution,” says Rob Sharps, T. Rowe Price’s boss.
Vanguard is expanding, through a partnership with HarbourVest
Partners, a big pefund of funds. Critics suggest that venturing into
an area known for high fees and opacity would send Jack Bogle,
Vanguard’s founder, spinning in his grave, but the firm argues that
the move helps to give the little guys access to markets previously
monopolisedbyinstitutions.
BlackRock,theworld’slargestassetmanager,hasbeenquietly
building analternativesbusiness. Ithas amassedassetsof
$320bn,morethanallbutthethreelargestalternativemanagers.
Halfitsbusinessisprivatecredit,muchoftherestpropertyand
infrastructure.Thefirmalsohasagrowth-equitypartnershipwith
Temasek,aSingaporeansovereign-wealthfund.AsBlackRock
movesontothesameturfasitsoriginalparent,Blackstone,there
mayin 20 years’timebelittletodifferentiatethetwoexceptfor
thesecondsyllableoftheirnames.
TheinvestorsLPs turn the tables
W
hen david swensendied last year, the investing world
mourned the loss of an icon. As head of Yale University’s
nest-egg, Swensen pioneered the endowment model: eschewing
bonds and lowering holdings of equities in favour of pe and prop-
erty. His philosophy was that long-term capital could give up some
liquidity for higher returns; and, with data scarcer in private mar-
kets, that it was easier for those who did their homework to gain
an edge. In his 36 years at the helm, the endowment grew from
$1.3bn to over $40bn, an average 13.7% compound annual gain.
The revolution Swensen started has spread to other endow-
ments and foundations, and then to sovereign-wealth and pen-
sion funds and money managers for the super-rich. Academic in-
stitutions remain the trailblazers. In the 2020 fiscal year, lever-
aged buy-outs, vcand real assets made up an average 39% of the
portfolios of American university endowments with more than
$1bn. Yale has 45% in buy-outs and vcalone. But institutional in-
vestors of all stripes have been gradually raising their allocations
to private markets, typically to percentages in the high teens or
low 20s. Many plan to go higher: in a survey last year by Preqin, a
research firm, around 90% said they expected to commit the same
or more to pefunds over the next 12 months.
Last November Calpers, America’s largest public-pension
fund with around $500bn under management, signalled plans to
increase peand private debt from 8% to 18% of its portfolio. This is
meant to keep Calpers’ expected returns above its long-term tar-
get of 6.8%; falling short would matter to a fund whose obligations
to pensioners already exceed the current value of its assets by over
$160bn. “Most lps just wish their boards would give them more ac-
cess to private markets,” says a consultant to big investors.
Their investments are mostly made through gp-sponsored
funds with a set lifespan. A growing share of funds buy investors’
existing commitments in the “secondary” market for pestakes.
This has boomed recently: 2021 saw a record $126bn in trans-
actions, 50% higher than in 2019, the previous peak. Big private-
markets firms like Ares and kkrare acquiring secondary special-
ists or looking for targets. lps used to sell stakes into the second-
ary market only in a cash crunch. Now they do so freely, as a tool of
active management, eg to increase exposure to a sector or reduce it
to a region. gps have become big secondary players, too. One pop-
ular innovation is a “continuation fund”, essentially a vehicle for a
gpto sell stakes to itself. One aim is to delay selling prized assets
that might have to be divested as an old fund winds down.
The 50 or so largest lps have used their clout to invest different-
ly. Some make half their private-markets commitments outside
fund structures, either “directly” or as “co-investors”, alongside a
fund (in which they may also have a stake). The busiest direct and
co-investors are Asian sovereign-wealth funds, such as Singa-
pore’s gicand Temasek, and Canada’s pension giants, including
cppInvestments and the Ontario Teachers’ Pension Plan (otpp).
The otppacquired 85% of the private assets in its $220bn port-
folio as a direct investor. It ranges from lottery operators to renew-
able-energy facilities. To beef up its capability it has built an in-
house investment team, now 350 strong. “We like influence, and
we think in a 30-year horizon. That’s too long for most private-The institutional investors whose capital fuels private markets
are growing more sophisticated