Private capital faces a strategic dilemma as scale outpaces substance in a reshaped investment landscape

For fund selectors and asset managers the choice between scale and substance has hardened into a strategic dilemma as product complexity, regulation and technology reshape the investment landscape.

“Regulatory obligations sit at the forefront of industry concerns,” says Le Truet, encapsulating a view echoed across industry research that the past few years of product innovation and market growth have arrived alongside a far more demanding compliance agenda. Frameworks such as the Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive, together with new European rules like the Digital Operational Resilience Act (Dora), Liquidity Management Tools and the shift towards a T+1 settlement cycle, are forcing firms to divert significant resources to governance, reporting and operational resilience. According to the European Securities and Markets Authority, draft technical standards for the revised ELTIF regime address asset life cycles, redemption policies and cost disclosures to make long-term investment vehicles more accessible to investors, reinforcing that regulatory change is structural rather than transient.

Scale is real and measurable. Industry studies show asset pools have expanded sharply, industry data cited by the Boston Consulting Group put global assets under management at a record level in 2024, and passive products and ETFs continue to attract sizeable flows. At the same time, the European Commission’s ELTIF 2 reforms and related initiatives have accelerated the “retailisation” of private capital, creating new distribution opportunities as managers seek cross-border reach into Asia Pacific, Latin America and the Middle East. McKinsey and Strategy& reports underline the broader market dynamic: clients increasingly want blended solutions that combine liquid and private exposures, and firms that can offer scale across product types, distribution and operating platforms are better positioned to compete on cost and access.

Yet substance, the ability to demonstrate durable performance, robust valuations and genuine sustainability outcomes, remains elusive in many corners. “The risk is that the industry mistakes scale for substance,” Le Truet warns. Greenwashing, label dilution and the consolidation of ESG data providers have made genuine differentiation harder to convey to selectors and end investors. The number of Article 9 funds has fallen and enthusiasm for ESG strategies has waxed and waned, illustrating how disclosure burdens and messy data can blunt what should be a competitive advantage.

Private markets crystallise many of these tensions. Valuation is “the most formidable obstacle,” Le Truet says, because private assets lack the observable pricing that public markets provide, leaving managers dependent on models and judgement. The expansion of retail-accessible vehicles such as ELTIF 2 has shortened reporting expectations, quarterly NAVs are being pushed to monthly or even weekly cycles, stretching workflows that were not designed for that cadence. ESMA’s technical work on ELTIFs and the Commission’s reforms aim to reconcile product life spans and redemption policies with investor protection,but operational frictions persist. Manual processes, paper-based workflows and fragmented data feeds make timely, defensible reporting difficult, heightening compliance and reputational risk.

Liquidity management compounds the challenge. The growth of semi-liquid structures has produced a mismatch between investor liquidity expectations and the illiquid nature of underlying holdings. Le Truet says stress testing, secondary markets and gating mechanisms are becoming essential. Regulators are formalising that shift: updated guidance under AIFMD II and UCITS revisions, together with new expectations for Liquidity Management Tools, will require managers to embed multiple liquidity buffers, swing pricing, anti-dilution levies, redemption gates or notice periods, supported by near real-time stress testing and the technology to deploy them.

Technology and data analytics are the battleground on which scale and substance can be reconciled. Firms are investing in AI, robotic process automation, APIs and cloud-native data architectures to automate reconciliations, accelerate KYC and prospectus extraction, and deliver more frequent, granular valuations. “In many private-market workflows, paper-based processes still dominate, underscoring the urgency of digitalisation,” Le Truet says. Industry surveys show managers are increasingly turning to index providers, fintech partners and specialist vendors to gain new skills and plug capability gaps; those partnerships matter as much as in-house scale in delivering reliable client outcomes.

The business arithmetic remains stark. Margin compression driven by passive competition is pressuring active managers to produce consistent alpha at competitive cost. Distribution reach has become as critical as performance,Le Truet argues, and firms that can combine diversified product suites, ETFs, active strategies, private assets, with interoperable servicing and distribution platforms will be better placed to defend margins. But consolidation and rising costs demand ruthless prioritisation: Strategy& and BCG analyses both highlight that growth in AuM since 2019 has not erased fee pressure, and that sustainable profitability requires leaner operating models and selective vertical integration.

For fund selectors the consequence is a more complex selection problem. Low-cost ETF exposures remain attractive, yet liquidity constraints and concentration risks in fashionable themes such as technology and renewables prompt caution. Selectors are increasingly blending private capital with liquid strategies, using semi-liquid structures and secondary-market mechanisms to balance liquidity and return. The result is hybridisation, products that straddle UCITS and AIFMD regimes, multiple share classes and currency layers, that raises reconciliation risk for legacy platforms and increases the cost of compliance.

Regulatory timetables add urgency. Dora entered into force in January 2025, reshaping technology risk management; T+1 settlement is expected to reshape liquidity and operational practices by 2027; and MiCA, LTAF and ELTIF reforms continue to alter the shape of permissible products and distribution channels. The cumulative effect makes it clear why Le Truet advises continued investment: “The industry must keep investing in scalable technology and stronger partnerships if it is to turn these regulatory and operational challenges into a competitive edge.”

In short, scale remains an important defensive asset in a crowded market, but without the substance of robust governance, transparent valuation frameworks and digitalised operations, size can become a liability rather than an advantage. The firms that reconcile the two, by embedding rigorous valuation and liquidity tools, investing in data and automation, and using partnerships to fill capability gaps, will set the benchmark as private capital expands and product complexity deepens.