PwC, the global network of business and tax consultancies, has put out a white paper on the near future of the alternative asset management industry, to and through the year 2020.
The paper begins with some numbers: by 2020, PwC expects the industry’s assets under management to grow to at least $13.6 trillion. Nearly half of that ($6.5 trillion) will be in the hands of private equity managers. Another $4.6 trillion will be in the hands of hedge funds and funds of funds managers. The remainder they categorize as investments in “real assets.” That is what the authors of this report call the “base case.” It reflects the likelihood of interest rate increases and “a normal correction in the capital markets” in both the United States and Europe.
The authors also outline an alternative scenario – continued accommodative monetary policies and capital growth – which gets the industry as a whole to $15.3 trillion in 2020. If so, almost half of that pie will be private equity, and $5 trillion of it will be hedge funds and/or FoHFs.
But more important than the numbers are the imperatives. The authors submit six “imperatives” for an asset manager who wants to get through the next four years safely:
- Choose your channels;
- Build, buy, or borrow;
- More standardization, more customization;
- From institutional quality to industrial strength;
- The right resources in the right places;
- It’s not only about the data.
Looking Into Those Headings
Under the heading “choose your channels,” the authors emphasize that sovereign investor assets will likely grow by 6.2% by 2020, which will put them at $15.3 trillion. [Coincidentally, that number is identical to PwC’s number for the optimistic scenario for the growth of the alternatives industry.] There will be interface between the two industries and this will be an important channel, and a challenging one, because sovereign investors will demand high levels of transparency, reporting, economic alignment, etc.
Sovereign investors, especially sovereign wealth funds (as distinct from public employees’ pension funds) are often looking to help their countries’ development. That means that in their interface with the alt investments world they tend to favor infrastructure and private equity investments.
The imperative to “build, buy, or borrow” refers to a choice among three growth strategies. Builders will leverage capabilities and existing platforms, regarding their in-house talent as something to be developed, not as something fungible. Buyers will beef up their talent, their track records, and their scale of operations “overnight” in the merger and acquisitions market. Borrowers will enter into customized partnerships with other institutions, “including other asset managers, wealth managers, private banks and fund-of-funds” as by joint ventures or distribution relationships.
Re-Tooling and Re-Centering
Under the heading of standardization/customization, the authors observe that over the new few years investor decisions are going to be driven increasingly by social and environmental concerns. Asset managers will customize solutions for investors with such concerns, and such customization will itself become standard. The authors cite a recent survey in which 18% of limited partner respondents said that they had withdrawn from an investment, or had withheld capital, on environmental, social, or governance grounds.
The fourth imperative is that asset managers will have to learn to be “adaptable to changes in their product mix and the demands on their operations” in a way analogous to what is now customary for industry, where firms regularly must “overhaul their operations and retool their factories.” The new adaptability will entail, for example, “reassessing the organizational design across key areas to ensure there is the right balance of vertical (fund/entity) vs horizontal (functional) orientation.”
Fifth and closely related to that sort of reassessment, there is the matter of getting the right resources to the right places. For example, “some large firms will shift middle and back offices to offshore transactions centres that support ‘business agnostic’ activities.” They may then build up “centres of excellence [to] focus on higher value activities than would be supported by a transaction centre.”
Finally, in the era of Big Data it is important to remember that “it’s not only about the data.” The data revolution will be over, the victory of Bigness in that realm will be assumed. The concern in 2020 will be with decisions informed by data.
Compliance officers in particular will face a different world in 2020 than the one to which they’ve been accustomed. They’ll “start each day reviewing key risk and compliance metrics presented in dashboard format “ and they’ll be in a position to drill down, immediately, into information that suggests something out of the ordinary. These authors make the compliance job seem destined to become much more sedentary over time.
The white paper concludes with an assertion that the next few years will give alternatives firms the opportunity for greater durability and profitability. Those two traits, durability and profitability, “will be essential credentials for any alternative firm which has ambitions to follow – or lead – the industry to the centre stage of the investment landscape.”