The culture clash of public and private markets
As fund managers are urged to diversify their product ranges, the fastest way to do this is via an acquisition rather than making new hires.
Earlier this week, Morningstar stated asset managers will need to consider diversification if they want to remain competitive in the fund management landscape and compete against passive providers.
“Flow prospects are greater for other categories, such as private debt, private equity or systematic trend strategies, but it is difficult to build up such expertise," the research house said.
Firms are already taking this to heart and expanding their range to include alternative products which have grown in popularity as investors seek a way to benefit from high interest rates.
But with the asset class in its infancy compared to equities and bonds, it can be difficult to recruit sufficiently experienced talents. In areas such as private credit, hires are more likely to come from investment banks than from other rival managers.
Matt McGilton, managing director at Kaizen Recruitment, said: “It used to be challenging to hire in the private credit space, it was in a semi-embryonic state. We mostly used to hire from banks which had large property credit teams, but now the space is building out and there is a larger talent pool.”
“Private credit is flying, we are seeing lots of demand to hire in that area,” said Mischa Bennett, managing director at Capital Executive Search. “But it’s not as easy to hire in those areas as not many people have that debt experience. We usually end up finding people from an investment bank.”
Research houses have previously flagged to Money Management they are concerned about the growth in private markets and the launch of funds by smaller players which lack experience in the space.
With these difficulties in mind, the Deloitte 2025 Investment Management Outlook outlined managers are considering M&A activity as an attractive entry point.
“Strategic alliances may provide investment managers who lack a significant private credit footprint, with a potential opportunity to grab a foothold in this growing asset class more quickly than a go-it-alone strategy would afford. It’s expected that these alliances will represent a greater percentage of private credit AUM growth in 2025 as new entrants to the asset class look to build fundraising momentum from the start.”
Recent moves in Australia include Magellan taking a 29.5 per cent strategic stake in systematic equity manager Vinva, GQG Partners taking minority stakes in three private markets firms from Pacific Current, and HMC Capital acquiring private credit provider Payton Capital.
In the latter two deals, both acquirers spoke of their desire to set up private markets division within their businesses to take advantage of the burgeoning demand.
But Deloitte warned both traditional fund managers and those who have moved over from private credit will have to adjust to each others’ way of working, which could cause culture clashes and lack of alignment, potentially jeopardising the success of the deal in the long term.
“The integration of traditional and alternative investment management poses its own set of challenges. Traditional investment managers typically operate under compensation structures, investment horizons, and decision-making processes that may vary from their alternative counterparts.
“For instance, traditional investment managers often focus on relatively liquid assets and may have compensation tied directly to short-term performance metrics. In contrast, alternative investment managers may take a longer-term perspective – one where the compensation structures reward long-term value creation and are often tied to the eventual success of the investment. Post-merger integration and resulting economies of scale may prove to be difficult to achieve due to the potentially incompatible cultures.”
Compensation at these types of firms may be structured as 2/20, with a 2 per cent management and 20 per cent performance fee, for example.
Bennett and McGilton said salaries in private credit are typically higher than other asset classes as they compete with investment banks for candidates with experience in origination, credit valuation and lending risk.
McGilton said: “Moving from listed markets to private can be a good move. There are more bonuses on offer. It’s more like a quasi-investment bank in that sense with a strong focus on getting deals done.”
Bennett added: “[Private credit] has gone up a lot in remuneration as firms chased the salaries offered by investment banks. Investment banking has the top talent and the most attractive candidates.”
Nevertheless, there is a shining example of success that firms can look to, as one of the leading private credit players in the Australian market is Metrics Credit Partners with $20 billion in assets under management.
The firm is an affiliate of Pinnacle, having come on board in 2013, and is seeing strong flow momentum with some $4 billion raised in the financial year.
“Metrics is on a mission, they are marketing like crazy, they want to greatly grow their FUM,” said Pinnacle managing director Ian Macoun.
AUTHOR
Laura Dew
Recommended for you
Grant Hackett has been promoted from CEO of Generation Life to head up the wider Generation Development Group.
Tribeca Investment Partners has made a distribution hire from Australian Ethical in a newly-created role focused on the national intermediary market.
Asset managers may be urged to diversify their product ranges, but investment executives have warned any M&A deal should avoid simply filling gaps and instead consider long-term value creation.
Specialist wealth platform provider Mason Stevens has become the latest target of an acquisition as it enters a binding agreement with a leading Sydney-based private equity firm.
