A growing appetite for illiquid investments among UK and European defined contribution (DC) pension schemes and wealth managers is driving up demand for private markets allocations, according to a report by asset manager Carne Group.
For its latest survey, Atlas 2024, Carne canvassed 201 investors across the UK, Europe and US, representing $1.93tn (€1.7tn) in combined assets under management (AUM).
Its findings show UK and European DC pension schemes are looking to increase their allocations to private markets by an average 10% over the next three years, while wealth managers expect private markets to account for 11% of their AUM by 2030, up from 5% in 2021.
The UK’s Long-Term Asset Fund (LTAF) and the European Long-Term Investment Fund (ELTIF) offer crucial routes for retail wealth managers and DC pension schemes to access highly demanded private asset classes, creating a significant opportunity for asset managers raising funds in Europe, Carne Group said.
Carne’s report also found innovation in fund structure through the launch of LTAFs and ELTIFs is a critical enabler in opening up the private market opportunity to DC savers and wealth clients.
Over eight in 10 (88%) UK and European wealth managers questioned expect their sector’s level of investment into private markets to increase over the next three years because of LTAF/ELTIF opportunities specifically, including 28% who expect that increase to be ‘dramatic’.
DC schemes responded similarly, with 78% predicting increased use of these structures and 31% “a dramatic rise”.
The opportunity for asset managers
This scaling up of private market exposure through LTAFs and ELTIFs presents asset managers with significant opportunity. While the vast majority of DC schemes and wealth managers intend to use LTAFs and ELTIFs in the next three years, currently only 24% of wealth managers and 18% of DC pension schemes already access private markets through an LTAF or ELTIF.
Carne’s research shows that asset managers on both sides of the Atlantic are recognising this opportunity and turning to LTAFs and ELTIFs as key enablers of engagement with this growing investor base. Nearly three-quarters (74%) of US managers surveyed, who have a presence in Europe, said they are considering launching an LTAF, while 42% said they are looking into ELTIFs.
Across the pond, the vast majority (82%) of UK asset managers are considering launching an LTAF, while 28% are looking into ELTIFs.
Barriers to market
While the LTAF structure has thus been cemented as a central pillar in the growth of private markets, according to Carne, a number of “significant challenges” for investment managers intending to bring such products to market remain, notably regulatory complexity, the manager said.
Respondents identified regulation as a key obstacle to successful European fundraising by US and UK managers. This complexity also has a commercial implication with the majority of managers (68%) expecting to spend between 25% and 50% more over the next two years on resources dedicated to managing regulatory compliance.
As a result, investment managers are increasingly turning to third-party specialists for support in launching and raising funds in Europe. The majority (87%) of managers questioned by Carne expect to increase their use of outsourcing over the next five years, citing a combination of motivations including reducing regulatory risk, achieving greater speed to market, and improving transparency for reporting.
Jeremy Soutter, managing director at Carne Group, said: “In the UK alone, DC assets are set to reach £1trn by 2030, with UK schemes looking to increase their allocation to private markets meaningfully in the next few years. This represents a huge market opportunity for the asset managers that can help fulfil this allocation.
“For wealth managers and DC pensions schemes, the LTAF and ELTIF serve as critical routes into illiquid asset classes and will catalyse the growth of private markets. Launching LTAFs or ELTIFs in a time-efficient manner will be critical for asset managers looking to capitalise on the private market opportunity.”
He added: “Equally, some asset managers may need to assess if an LTAF or ELTIF is indeed necessary. With a number of DC master trusts now having, or planning to have, their own LTAF in place, asset managers may find they’re able to be appointed as sub-advisers within a scheme’s LTAF umbrella structure.”
Soutter noted that launching an LTAF can be a “complicated, lengthy and costly process”, made more difficult by the competitive pressure to get to market quickly, a challenging commercial backdrop in which cost-effectiveness is key, and an increasingly complex regulatory agenda both in the UK and the European Union.
As a result, Soutter said that Carne has witnessed “a significant number of asset managers turning to third-party specialists to steer LTAFs through the regulatory process and enable speed to market”.
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