Morningstar warns of “headwinds” for private market firms

Morningstar has warned that private market firms face some near-term headwinds, despite signs of recovery in the traditional asset management landscape.

According to the financial services firm’s fourth quarter European Asset Managers Pulse, traditional asset management firms are currently benefitting from active flows recovery and lower interest rates, while challenges are emerging for private markets.

“While traditional asset managers are showing signs of recovery with modest net inflows and benefiting from potential reallocation to higher-fee products, private market firms face near-term headwinds,” said Johann Scholtz, senior equity analyst at Morningstar.

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“Challenges such as weaker private market returns, limited exit opportunities, and cautious investor commitments could pressure private market valuations.

“Interestingly, traditional asset managers currently trade at a significant discount compared to their private market counterparts, despite maintaining strong profitability and steady growth prospects.”

Morningstar has predicted that while longer-term fundamentals for private market firms remain intact, investors will soon demand better returns.

Pitchbook’s Private Capital Index has returned seven per cent in the year-to-date, materially below the 13 per cent it has achieved over the past 10 years.

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Weaker performance should lead to lower performance fees, Morningstar said, which will have a knock-on effect on private market managers’ revenue. The firm suggested that lower interest rates could support better exit multiples and make for easier refinancing, leading to improved performance.

“We think private market firms are priced for perfection and that any earnings disappointments could cause their valuations to come under pressure,” the report stated.

“We expect an average annual earnings growth of around seven per cent for traditional European asset managers over the next three years, compared to around 15 per cent for private market firms.”

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