Private credit firms are hot acquisition targets. As M&A ramps up next year, here are the firms likely to be bought.

• Firms want more private market products to offer clients and are willing to buy instead of build.
• Private credit firms with $30 billion to $70 billion in assets will be the firms to watch.
• While deals make sense on paper, firms might have to deal with potential culture clashes.

The trend in asset management is pretty clear — private markets are the new black.

"If you're not in private markets or private credit, you'll need to move in that direction, or you'll get left behind," PwC financial services deal leader Greg McGahan told Business Insider.

Asset managers who have traditionally relied on ETFs and mutual funds to make money are itching to expand into alternative assets to diversify their offerings and boost fee revenue, a new PwC report said. That demand and expectations that interest rates will continue to drop and incoming light-touch regulators mean asset managers are ready to dust off their dealmaking playbooks.

Private credit firms specifically are in demand, as shown by the blockbuster BlackRock deal announced last week. The asset management giant agreed to buy the private credit firm HPS Investment Partners for $12 billion.

And it's not just the traditional money managers. Private equity firms are also using acquisitions to strengthen their private credit capabilities and market presence. PwC sees increasing competition in private credit contributing to the consolidation of alternative asset managers.

McGahan said private credit firms with between $30 billion and $70 billion in assets under management will be the ones to watch. They will either need to make a deal to grow bigger or be snapped up themselves.

"Those types of shops potentially could be absorbed into other shops that are looking to grow their portfolios," he said. "It's either acquire or be acquired."

Deals in alternatives will also be driven by aging founders in the private markets space who are trying to figure out succession planning and capitalizing on the ability to monetize their investments.

For his part, McGahan is seeing his deals practice's work ticking up and "getting up to full capacity. We'll be at supersaturation levels pretty shortly. So, I think you're seeing that pent-up demand now manifest itself."

Questions of culture

While the marriage of firms operating in one investing discipline with another makes sense for diversification reasons, the actual integration of the two could be trickier.

Culture and compensation are very different between traditional firms and alternatives. A portfolio manager at a publicly traded mutual fund might receive cash compensation and equity stakes. If you're a private equity manager, you're paid with carried interest, or a percentage of profits generated from the firm's investments.

"Could you have within a large traditional manager basically an alternative platform where the PMs are earning multiples of the existing PMs on the traditional side? That's going to be a cultural challenge,' McGahan said. He added there are also operational differences and gave the example of a private credit firm using treasury functions daily versus a private equity firm that uses a couple times a month.

The question of cultural fit is top of mind at BlackRock when the asset manager makes acquisitions, according to the firm's CFO Martin Small. BlackRock has made several high-profile acquisitions this year, snapping up Global Infrastructure Partners in January in addition to HPS.

Small, who was part of many meetings with HPS's executive team to test the waters, said the cofounders shared important values with BlackRock CEO Larry Fink and firm president Rob Kapito.

"We all speak the same language," Small said at the Goldman Sachs Financial Conference in New York. "They're founders. Larry Fink and Rob Kapito are founders. We're client-centered firms. We believe in scale, we believe in global."

Integrating two firms successfully requires lots of important — if technical— work behind the scenes, Small added.

"People, platform, process — think about all the pedestrian things of the employee experience. You've got to be on the same email system, you've got to make sure people's laptops work, you've got to make their key cards work at the door, " he said. "All of that's done so we can just get to business on realizing the synergies and delivering for clients.