While traditional asset management firms are recovering, benefitting from active flows recovery and lower interest rates, private-market firms face near-term headwinds, according to Morningstar's Q4 2024 European Asset Managers Pulse.
Johann Scholtz, senior equity analyst at Morningstar said: “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.
"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.”
Among the key takeaways, active fund flows show signs of a (modest) recovery: Investors switching to passive products remain the main threat to traditional European asset managers. The modest net inflows seen over the last four months in Morningstar Direct’s flow data for European-domiciled funds are encouraging.
Lower interest rates should see reallocation from money market to higher-fee products: If interest rates decline as expected, we foresee investors looking for higher returns in other asset classes. As most products carry higher fees than money market funds, this would be a positive development for European asset managers’ revenue.
Longer-term fundamentals for private-market firms remain intact, but investors will demand better returns: European private equity fundraising tracking is 20% higher despite challenging environment: Higher interest rates and the low multiples on offer on comparable investments have limited the opportunities for private market asset managers to sell their portfolio investments. Consequently, limited partner investors hesitate to commit fresh capital before receiving the cash from existing investments. Despite this, Pitchbook’s fundraising data for European-based funds suggest a record fundraising year could be on the cards, tracking 20% higher compared to 2023 if we annualize the first 9 months of the year.
Recent private-market returns are lagging long-term averages: Pitchbook’s Private Capital Index has returned 7% year-to-date, materially below the 13% it has achieved over the past 10 years. Weaker performance should lead to lower performance fees, which contribute a significant portion of private market managers' revenue. Lower interest rates could support better exit multiples and make for easier refinancing, leading to improved performance.
Morningstar further sees greater upside potential in the valuation of traditional managers than their private market counterparts
Traditional asset managers trade at a discount to the broader market and their long-term average, while private market managers attract high premiums: Morningstar acknowledges that the traditional asset management industry is facing stiff secular headwinds. The switch to passive investing will continue to pressure fee margins, and investors will increase their allocation to private markets. It does however, believe that the negativity is overdone. In contrast, Morningstar thinks private market firms are priced for perfection and that any earnings disappointments could cause their valuations to come under pressure.
Currently, European traditional asset managers trade at 10 times its 2025 earnings estimates compared to the 32 times for the European private market firms it covers.
It does not believe that the high single-digit PE multiples traditional asset managers trade at prices in any growth: We expect an average annual earnings growth of around 7% for traditional European asset managers over the next 3 years, compared to around 15% for private market firms.
Traditional asset managers remain very profitable businesses: With their minimal capital requirements, Morningstar estimates that traditional European asset managers will still generate an average midcycle return on invested capital (ROIC) of 18% compared to 31% for private market firms.
