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Growth of private capital funds accelerates as ETFs slow

Private equity

Growth of private capital funds accelerates as ETFs slow

Private assets sparkle with prospect of higher returns

Critics say that exchange traded funds are devouring markets. But in reality, the hottest trend in the global asset management industry is the growth of private capital, which is swelling at nearly twice the rate of ETFs. 

The global ETF industry has taken in another $350bn in the first three-quarters of 2019, taking its total assets under management to $5.8tn, according to ETFGI, a data provider. However, there is also burgeoning interest in so-called private assets, such as private equity, venture capital, infrastructure, real estate and private debt.

The pace of net new money flowing into ETFs has slowed somewhat this year, from 9 per cent in 2018 to 8.2 per cent in the first six months of 2019, according to Morgan Stanley. Meanwhile, the growth of private capital funds has accelerated, with net new money picking up from 14 per cent last year to 15.1 per cent in the first half of 2019.

However, what Morgan Stanley terms the “barbelling” of the investment industry — with money gushing into either cheap, index-tracking vehicles or expensive, often complex “alternative” investment funds — has left many traditional asset managers struggling. They saw net new money growth of just 2.3 per cent in the first six months of 2019, according to Morgan Stanley.

The attraction of private capital is twofold: it holds the promise of higher returns at a time when the outlook for mainstream public markets has dimmed; and the private, untraded nature of the assets mean they are less volatile

Earlier this year, a BlackRock survey of 230 institutional investors with more than $7tn under management revealed that 51 per cent of the respondents planned to trim their exposure to public equities — but almost half intended to put more money into private markets.

As a result, several big asset managers are building up their private capital side. BlackRock last year bought Tennenbaum Capital Partners, a private debt group, and earlier this year set up a $2.75bn private equity fund, while Franklin Templeton has bought Benefit Street Partners, a private credit investor. 

However, some analysts and investors are concerned at the rapid pace of expansion in private markets, and have cautioned that it could exacerbate the next economic downturn.

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