Setting the stage for innovation in Private Capital Markets

AUM in private capital markets has skyrocketed over the last 20 years – 12x to c. $12tn by mid 2022. [1]

Bain & Company suggests institutional investor appetite for this asset class is far from satiated, with a further 8% CAGR forecast until 2032 [2]. However, everyone for the last few years has been getting excited about this picture:

It basically says i) individual investors are important (they hold c. 50% of the global AUM), and ii) their allocation to private capital markets is small. Much of the innovation over recent years has been around democratising access to alternatives, Moonfare , Titanbay , iCapital , Opto Investments , and others have increased digital pathways to myriad alternatives products. This 1st order effect of innovation appears to be working; according to Forbes , financial advisors allocated 10.5% of their clients portfolios to alternatives in 2021, 14.5% by 2023, and are expected to allocate up to 17.5% in 2024. Millennials and Gen Z's are also bullish, with 72% of those demographics saying they dedicate 10-20% to alternatives.

This shift is already playing out, KKR was raising $500m a month into a new set of funds designed by individual investors. [3]

Scale is a critical factor to focus on as it’s the domino that leads to a shift in fees (read margin pressure), and regulatory attention (read drive for transparency). These in turn force operating models to evolve and value chains to digitise, processes move from manual to a level of automation. The industry is just at the foothills of understanding and adapting to these inevitable 2nd order effects. As a B2B FinTech investor, this gets exciting.

Deloitte [4] reported in 2019 that the asset management industry spent $50bn on data and technology and that this spend would grow to $83bn in 2023. While this is rising and in 2022, according to BCG [5], technology costs were 15% of operating across the industry (up from 13% 5 years ago), this is i) still tiny, and ii) most spend goes on maintaining the legacy IT spaghetti.

For context the banking industry spent $650bn on technology in 2022 in absolute numbers, or c. 13% of industry revenue. In contrast, the asset management industry spent c. 7% of industry revenue – c. 45% less [6]. 75% of the industry spends <=10% of the IT budget on innovation. Industry top performers spend nearly 50% more on technology (as a % of operating costs) and nearly double (as a % of tech spend) on innovation.

Why is this exciting for a B2B FinTech investor? Precisely because the above suggests we are just crossing into the early majority of the technology adoption cycle.

For the mathematically minded the area under the adoption curve looks like this:

The punchline is the rate of growth is fastest in the early majority.

In essence, the evolution and scale of private capital markets is reshaping the investment management operating model. We are excited by the early innovators Accelex , LemonEdge , 73 Strings , bunch , CARDO AI , Jaid , valid8Me , FINBOURNE Technology .

[6]- Analysis supported by data from McKinsey Global Banking Review 2023, Gartner 2023 Forecast Worldwide Banking and Investment IT Spend, and Deloitte Driving competitive advantage in investment management report.