Alternative investment managers are facing challenges that widen the gap between large and small entities. S&P Global Ratings warns of the difficulty in attracting new funds and the pressure from investors to increase their capital contributions.
Alternative investment managers are going through a period of difficulties that, according to S&P Global Ratings, is causing a growing divide in the sector. In a report titled Slow exits are redrawing Europe's alternative asset management map, S&P notes that macroeconomic volatility and low divestment activity are creating a deep structural bifurcation in the European market.
Analysts explain that delays in realising fund exits and the reduction in return distributions negatively impact the raising of new capital. Institutional investors are maintaining a significant portion of their allocations in older funds, which limits their willingness to commit to new investment vehicles.
Moreover, the situation is favouring large managers, who are capturing a larger share of the new available capital, while smaller firms face significant challenges in raising funds unless they can demonstrate an exceptional track record of profitability.
The pressure on managers has also increased, as investors demand that they contribute more of their own resources to their vehicles, a requirement known as skin in the game. This percentage has risen from the usual 1%-2% to a range of 2% to 4% of managed assets, creating additional capital needs for many managers.
The scarcity of resources for fundraising in alternative investment is driving consolidation in the sector, with major players diversifying their strategies to compete with managers from the United States. This will likely accelerate merger and acquisition processes within the industry.
Finally, S&P also highlighted that, despite the pressure on margins, alternative asset managers have maintained relatively better performance than their counterparts in traditional products. However, the profitability of alternative investment has stagnated after years of benefits from low interest rates.
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