Future of Alternatives 2025: Growth in Europe amid Headwinds

Market uncertainty poses challenges, but European alternatives are set for continued growth over the next five years

A number of overarching themes will characterize the investment landscape in Europe over the next five years. The immediate uncertainty is COVID-19 and how the EU’s €750bn recovery fund will impact economies when it starts to be distributed in 2021. How Brexit unfolds will also have a significant impact on Europe’s alternative asset management landscape in 2025. Despite the imminent end of the transition period, issues surrounding access to EU markets for the UK’s financial services sector remain unresolved. Activity has been shifting to mainland Europe, with asset management hiring activity in the UK described by the Financial Times as being in a state of “paralysis” during 2020 – in contrast, the number of people employed in rival cross-border fund management hub Luxembourg rose by 5%. 

Europe’s aging population will progressively alter the region’s economies over the coming decades. The number of people aged over 65 in Europe is projected to increase from 101 million in 2019 to 149 million in 2050. The extent to which this is a burden on government finances and a drag on growth, or whether Europe’s ‘silver economy’ will create new services and stimulate progression, will be a significant determinant of the region’s future prosperity. 

These challenges, combined with the relative attractiveness of other markets, look to be weighing on the minds of fund managers. Among those surveyed for Future of Alternatives 2025, 30% see Europe as providing the best opportunities for investment now, but this proportion decreases to 21% with managers’ predictions for 2025.

Despite the uncertainty, European alternative assets under management (AUM) are set to grow. Preqin is forecasting a CAGR of 5.4% between December 2019 and December 2025, with total AUM increasing from $2.17tn to $2.83tn (Fig. 1). In 2020, the European alternative assets industry stands in between the large, developed market of North America, and the high-growth industry of Asia-Pacific. By 2025, this will have changed: Preqin predicts that alternatives AUM in Asia-Pacific will grow at a faster rate (25.2%) than that of Europe over the next five years.

Private equity will remain the largest of the alternative asset classes in Europe, with a predicted CAGR of 6.5% through to 2025 taking AUM to $4.36tn. We expect private equity’s share of Europe-based alternatives AUM to rise from 32.7% in 2020 to 36.8% in 2025. Private debt is expected to grow at a CAGR of 17.3% and hit $576bn in 2025.

Real assets have seen significant deal activity over the past decade (Fig. 2). The number of private equity real estate deals increased from 322 in 2010 to 2,492 in 2019, while their value surged from $17bn to a high of $143bn in 2018. The following year saw a drop to $93bn with the particular problems caused by COVID for real estate deals likely to result in further falls in 2020. Private infrastructure investment value had been above $85bn each year in the past decade, peaking at $205bn in 2018.

Moving on from Brexit
The biggest potential impact of Brexit on the alternatives industry is likely to be on fundraising. Details on fund passporting and how the Alternative Investment Fund Managers Directive (AIFMD) will apply to UK funds going forward are still to be worked out, though in practice these are unlikely to be significant barriers to investment. More than half (56%) of the fund managers surveyed by Preqin do not expect Brexit to impact their business over the next five years. Of the remaining 44%, more respondents expect the Brexit effect to be negative (32%) than positive (13%).

Across Europe, countries are focused on the urgent task of rescuing their stricken economies. Both France and Germany have unveiled $100bn+ stimulus packages. France’s includes plans for $8.4bn of investment in the digital sector over the next two years, including start-up investment, infrastructure investment, and digital transformation. This comes at a time when France is already seeing activity in digital infrastructure, as reported in Preqin’s Alternative Assets in Europe report. 

In Germany, the transformation of the country’s SMEs – known collectively as the ‘Mittelstand’ – will continue to attract private capital investors keen to play a role in managing succession at the firms that are the backbone of the economy. German SME bank KfW calculated that in 2016, 39% of all business owner-managers were over 55, up from 20% in 2002, meaning that some 1.4 million SME owner-managers are approaching or past retirement age. The Mittelstand has long been of interest to private equity firms, but with McKinsey reporting that 77% of Mittelstand businesses surveyed in April 2020 were positive on the outlook of their business, private equity fund managers will have to continue to patiently develop relationships if they are to gain access to this treasure trove of industrial companies. 

Download a data pack containing all the charts in our regional articles for Future of Alternatives 2025. For more predictions and projections on the future of the alternatives industry, visit Preqin's Future of Alternatives 2025 Content Hub.