PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for 2022.
Intersection of traditionals and private markets
This year, there has been no shortage of investment activity in the private markets. Private equity (PE) in particular has accounted for a record proportion of deal-making, spurred by low interest rates and record fundraising. The US PE market topped $4 trillion in assets under management (AUM) in 2021, having grown at about 15% compound annual growth rate (CAGR) over the last five years, and nearly half of that comprises uninvested dry powder, presenting enormous future investment opportunities for PE managers.
As PE has boomed, so too has private credit, with a focus on sectors where banks have faced regulatory or risk-related concerns, and mid-market firms, which may not have ready access to the bond market. Funds that provide leverage for PE buyout deals have been inundated with investment opportunities, especially as traditional banks and other financial institutions have pulled back from direct lending. The private credit market currently stands at about $700 billion of AUM, and we predict that figure will grow 2.5 times to $1.8 trillion by 2025.
Given the strong inflows, significant future growth prospects and track record of delivering superior risk-adjusted returns of such funds, we expect traditional asset managers will seek to break into or expand their existing footprints in the private markets sector. Firms are continuing to look for ways to fill gaps in product offerings and provide “one-stop shopping” for their clients, who are increasingly interested in gaining exposure to various asset classes without having to invest across multiple firms. We’ve already seen a beginning to this trend late in 2021, highlighted by T. Rowe Price’s announcement in October that it will acquire credit manager Oak Hill Advisors for $4.2 billion and Franklin Templeton’s announcement in November that it plans to acquire PE secondaries business Lexington Partners for $1.8 billion. These deals also provide traditional firms with the diversification they need to combat the pressures of the continued investor shift away from actively managed products such as mutual funds.
While valuation multiples may be prohibitive for some, we expect larger firms with significant buying power to lead the way with majority takeovers. However, don’t be surprised to see mid-sized AWM firms dip their toes into the alternatives market by buying or building captive minority investment platforms, which have increased in popularity. Minority investments provide acquirers with attractive yields that liquid products struggle to match, while providing sellers with a solution to succession planning concerns and/or partial liquidity options for founding partners who want to avoid the complexities that might accompany a public offering.
“Larger deals could be on the horizon in 2022, as AWM firms search for ways to add product and distribution diversity outside of traditional investing.”
Asset and Wealth Management Deals Leader, PwC US
Principal, Strategy&, PwC US