Moving centre stage: Alternative asset management in 2020
By Mike Greenstein and Barry Ness, PwC
Published: 18 December 2015
Over the past several years, rapid developments in the global economic environment have pushed asset management to the forefront of social and economic change. An important part of this change -- the need for increased and sustainable long-term investment returns -- has propelled the alternative asset classes to centre stage. To help alternative asset managers plan for the future, PwC’s Asset Management practice has considered the likely changes in the alternative asset management industry landscape over the coming years and identified six key business imperatives for alternative asset managers. We have then examined how managers can implement and prosper from each of these six imperatives.
The landscape in 2020
What factors are driving this evolution? First, regulation will continue to hinder banks: for alternatives, this furthers significant opportunities such as hires from banks and the opportunity to further step into the funding gap. As the world population ages, retirement and healthcare will become critical issues that asset management can solve. Capital preservation and alpha generation will be key. In addition, asset managers will dominate the capital raising required to support growing urbanisation and cross-border trade: growing asset classes in infrastructure and real estate play into alternatives firms’ areas of expertise. And lastly, asset managers will be at the centre of efforts by sovereign investors to invest and diversify their huge pools of assets; alternative firms are ideally positioned to partner with them.
As a result, alternative assets are expected to grow between now and 2020 to reach more than $13.6 trillion in our base-case scenario and $15.3 trillion in our high-case scenario. Assets under management in the SAAAME (South America, Asia, Africa and the Middle East) economies are set to grow faster than in the developed world as these economies mature. This growth will be evidenced by the projected emergence of 21 new sovereign investors, the vast majority of which will originate from SAAAME.
This growth in assets will be driven principally by three key trends: a government-incentivised shift to individual retirement plans; the increase of high-net-worth individuals from emerging populations; and the growth of sovereign investors. This creates the need for more tailored, outcome-based alternative products that provide capital preservation, but provide upside opportunities.
Alongside rising assets, there will also continue to be increased regulatory requirements, rising costs and pressure to reduce fees. Alternative firms do not escape this pressure, and will seek to respond proactively.
Furthermore, distribution will be redrawn, as regional and global platforms dominate. New markets and untapped investor types will open up if alternative firms can develop the products and access the distribution channels to tap them. By the early 2020s, four distinct regional fund distribution blocks will have been formed allowing products to be sold pan-regionally. These will be North Asia, South Asia, Latin America and Europe. However, these blocks benefit traditional firms more than alternatives firms, so distribution alliances will be critical for alternatives firms.
Meanwhile, alternatives will become mainstream. The term “alternative” - already strained to reflect a mix of different strategies, products and firms - becomes further flexed. The growth of liquid alternative products, either in the form of mutual funds or UCITS, continues to create greater integration between alternative and traditional asset management. By 2020, alternative asset management will become synonymous with “active asset management” and, increasingly, “multi-asset class solutions”.
As a result, a new breed of global manager will emerge. Traditional managers leverage their existing platforms, distribution capabilities and brands to develop full-service, multi-asset class alternative businesses. A few of today’s largest diversified alternative firms will become mega-managers in their own right, establishing a presence in all the key geographies and investor segments. The largest alternative firms will continue their growth trajectory and diversification through product, asset class and distribution expansion, fuelled by build, buy and borrow strategies. Specialist firms will seek “best-of-breed” status by producing sustained performance, while certain emerging firms will fight for shelf space.
And finally, by 2020, technology and data-informed decision-making will become mission-critical to drive investor engagement, data analytics, operational and cost efficiency, and regulatory and tax reporting. Data management and investment in technology have not always have been a top priority for alternative firms – but this will change.
Six key business imperatives
We believe that this evolving landscape will create six key business imperatives for alternative asset managers:
1. Choose your channels
Alternative firms by 2020 will adopt world-class ideas and practices from the broader financial services industry and from traditional asset managers. They will develop more sophisticated market strategies, more focused distribution channels and better recognised brands. Most alternative firms will work out exactly which investor channel or channels they want to target and develop relevant strategies and products. Some will focus more systematically on sovereign investors, pension funds, other sophisticated institutions and private wealth markets. Others will target emerging markets, and still others will pursue the potentially huge asset flows through liquid alternative products. A small number of mega-managers in the alternatives space will operate across all major geographies, channels and strategies.
2. Build, buy or borrow
Greater segmentation of investors will, in turn, drive greater segmentation of the managers themselves. Deciding which segment of the market to inhabit will require alternative firms to more consciously evaluate what they are as an organisation and where they want to be. They will typically aspire to be one of the following types: diversified alternative firms, specialty firm or multi-strategy firm.
All these models exist today. The difference is that firms will by 2020 explicitly choose a growth strategy in order to remain competitive. To develop the chosen business model, firms will pursue one or more of three growth strategies: building, buying or borrowing. Builders grow by building out their internal organizations, leveraging and developing their existing capabilities and investment talent.
Buyers expand their alternative capabilities across asset classes and strategies by acquiring talent, track record and scale overnight. Borrowers partner with other institutions, including asset managers, wealth managers, private banks and funds-of funds, to expand their investment capabilities and distribution channels. These borrowing relationships include, but are not limited to, distribution arrangements, joint ventures and sub-advisory relationships.
3. More standardisation, more customisation
The polarisation of the alternatives industry into standardised and customised solutions, already in evidence in 2015, becomes even more marked by 2020. This shift responds to three key investor demands. The first is the ongoing demand by the largest institutional investors for made-to-order products, providing greater customisation and strategic alignment. The second is demand for next-generation commingled funds that are more focused on outcomes. The third is demand for liquid alternative funds in standardised formats as some institutional investors, as well as the mass affluent and newly wealthy, seek easy access to alternative strategies.
4. From institutional quality to industrial strength
Owners, investors and regulators will broaden their expectations from “institutional quality” to “industrial strength”. They will expect alternative firms to operate in a way that goes beyond the prerequisite quality standards to operate even more effectively and offer a broader range of capabilities. Having institutionalised their businesses, alternative firms will seek the higher standard of “industrial strength”.
Firms will revamp their operations in a cost-effective way that is not disruptive to their day-to-day business. This includes embedding more data-informed decision-making to estimate the impact of business mix changes and process improvement on costs and revenues. They will then implement these process improvements, eliminating operating inefficiencies by automating and outsourcing processes. Firms will look to transform labour-intensive functions like compliance, tax and investor servicing into ones that are more technology-enabled, scalable and integrated within the overall operating environment. To do this, larger firms will build in more resource bandwidth with change agents who will drive process improvement while core teams continue to drive day-to-day operations. Firms will also seek to better control operational risk, systematically identifying, prioritising and managing operational risks to target areas of potential vulnerability.
5. The right resources in the right places
By 2020, the shift to data-informed decision-making leads to improved organizational designs that can better deliver the right resources to the right places. Design elements that will be adopted by alternative firms include: centres of excellence to leverage expertise; dedicated teams to focus on underserved areas; sourcing strategies to reduce costs for high-volume, repeatable processes; and location strategies to bolster a firm’s presence in a particular jurisdiction or to reduce cost.
Many alternative firms will also make more effective use of right-sourcing strategies. In some cases, they will shift to using outsource providers or utility-like platforms where key skills or geographic coverage can be provided more cost-effectively, externally. In other cases, alternative firms will continue to use in-house support functions to take advantage of operating leverage benefits. Successful right-sourcing efforts are accompanied by more systematic and efficient internal oversight to bridge the gap between external service providers and internal resources.
6. It’s not only about the data
Data and data-centricity are key business imperatives in 2015. By 2020, the focus of leading alternative firms will have largely moved on. They will have laid the necessary “plumbing”, and accessing data across their organisations will be as natural as turning on a tap. To do this, they will adopt data standard protocols allowing all parts of the organisation to exchange information, creating a self-service model. These protocols will also speed information exchange with key counterparties and service providers.
The result will be a data-centric, self-service environment in which time is spent on the analysis and reporting of data, rather than on the manipulation of data. The resulting analytics enable alternative firms to better measure the strength of their operational processes and enhance key functional areas such as tax, compliance, reporting and investor servicing. The model will also help plug the current drain on resources in the manual and non-standardized areas of portfolio monitoring, operational due diligence and investor on-boarding.
This article was excerpted from “Alternative Asset Management 2020: Fast Forward to Center Stage.” For the complete report, please visit www.pwc.com/alts2020.