Driven by growth: consolidation among alternative funds

Global alternatives markets had a stellar year in 2021, with record levels of fundraising, investment, exits and performance across many of the asset classes grouped together under the alternatives heading. At the start of 2022, Preqin research suggested private equity and venture capital remained by far the largest of those asset classes, with more than $13trn assets under management (AUM) – almost half of all alternatives AUM.

Preqin found that 83% of institutional investors intend to maintain or increase their investments in alternatives. It predicts that global alternatives AUM will grow from $13.32trn at the start of 2022 to $23.21trn in 2026. In these circumstances, it is perhaps unsurprising that we have seen consolidation in the alternatives fund space during the past two years.

“Larger asset managers are buying fund managers to diversify their own products,” says Andrew Roberts, Senior Director at RBS International. For example, in March 2021, investment manager Nuveen acquired renewable energy fund manager Glennmont Partners, in order to extend its participation in renewable energy markets.

The past 18 months have also seen a number of fund managers and funds in the UK, mainland Europe and the US completing IPOs, using them as an exit route and/or a way to obtain resources needed to enable further growth. Examples during 2021 included Foresight Group, Bridgepoint and Antin Infrastructure Partners.

Lifecycles and growth

In some cases, corporate activity and/or an IPO may form the next stage in the lifecycle of a fund manager. Founders may have reached a point in their career when they want to step back, or they may be looking to access wider pools of capital or distribution networks. Cyclical forces may also have an influence, although it’s too soon to say whether longer-term macroeconomic cycles will drive this activity, simply because the majority of alternatives fund managers are relatively young businesses.

But the primary driver for consolidation activity is often a fundamental need for growth, says Matt Hammond, Partner at Foresight who is responsible for strategy and business development. “Consolidation is driven by growth because it’s a scale business in many ways and has become even more so recently, for a variety of reasons,” he says. Those reasons include tighter regulation in relation to governance, or sustainability issues and ESG reporting.

Hammond says Foresight’s own strategy has evolved as the sectors on which it has focused – renewable energy and UK regional SME and venture investing – have adjusted. “Over 20 years, since the first financial capital was invested in renewable energy, pricing points and how people value things have changed,” he explains.

This may mean that the cost basis on which a fund is established may be obsolete just a few years after launch. “Some businesses will go from nothing to being quite successful – or vice versa – reasonably quickly,” says Hammond. “So the nature of investing in renewable energy and infrastructure has itself driven some corporate activity.”

Growth is good

The principle underlying Foresight’s strategy has been a desire to grow. “We either use fundraising avenues to create new products, or we bring on board someone else’s fund that is aligned to our investment strategies,” says Hammond.

In 2019, Foresight acquired the advisory mandate for John Laing Environmental Assets Group (JLEN), bringing in assets focused on wastewater and waste management processes including biomass energy generation. In 2020 it acquired the Pensions Infrastructure Platform (PiP), which provides investment expertise and asset management to pension schemes that are invested in UK infrastructure, including major public sector schemes and the British Airways pension scheme.

” Some businesses will go from nothing to being quite successful – or vice versa – reasonably quickly. So the nature of investing in renewable energy and infrastructure has itself driven some corporate activity” Matt Hammond, Partner at Foresight who is responsible for strategy and business development at Foresight Group.

Then, in June 2022, Foresight acquired the technology ventures division of Downing LLP, including management of two venture capital trusts and the Downing Ventures Enterprise Investment Scheme. This added about £275m to its total AUM. In July 2022, Foresight expanded its Australian business by acquiring Infrastructure Capital Group, a leading Australian specialist infrastructure fund manager with £2.8bn AUM. Today, the Foresight Group has about £12.2bn AUM (Foresight plus Infrastructure Capital Group combined AUM).

“The real test is whether those acquisitions present better opportunities than our own organic growth opportunities, because there are plenty of those as well,” says Hammond. For example, in November 2021, Foresight took its Foresight Sustainable Forestry Company, an investment company specialising in UK forestry and carbon credit assets, through an IPO on the London Stock Exchange.

Hammond believes the alternatives space will continue to develop and offer many more opportunities for managers and investors over the next few years, particularly in relation to ESG issues.

“Sustainability themes that drive a lot of policy thinking lead to investment opportunities for us,” he says. “Those are global themes now, but the world is dealing with those issues at different rates. The next stage will be that those sustainability issues will spread across the rest of the economy and will have implications for a lot of different industries.”

Horses for courses?

How consolidation in the alternatives fund markets will affect flows of capital from retail, wholesale and institutional investors remains to be seen. But the appearance of some very large funds appears to be inevitable, says Anna Layard-Liesching, Head of Liability Sales at RBS International. “As funds get larger, this is naturally going to inflate minimum and average asset sizes along with increasing minimum investor commitment levels.”

“Is that a good or bad thing for the market? If you see a lot of consolidation and you have these mega funds, does that open up opportunities for small funds to find specialised niches? Or does it push out smaller players? All of this is up for debate.”

However, Layard-Liesching does note that variety within the market has been one of the reasons behind its success to date. “The idea of being a niche, nimble fund manager is what investors were coming into the sector for in the first place,” she says. “The bigger you get, the harder it is to have that edge. You have a lot more scrutiny, certainly after an IPO, when you’re beholden to a different group of investors.”

At the same time, there continues to be a stream of people ready to try to find new opportunities in a growing, rapidly developing market. “There’s no shortage of people looking to start new fund managers,” says Hammond. “It’ll be interesting to see what happens as we head into different economic times, with rising interest rates and inflation; and quantitative tightening.

“But there’s also a lot more interest in real assets, in yielding assets, and in those investment opportunities that have the appropriate sustainability credentials: where money is being invested to push our economy and society to where it needs to be. That’s not going to stop.”

In short, this is a rapidly evolving, fascinating asset class, which will continue to offer well-run funds – and investors – unique and rewarding opportunities for years to come.