Disruption is the trend of the moment in many industries and the investment world is no exception. Deloitte Insights has just posted an article that takes a comprehensive look at the investment world today, traditional and alternative. Its theme is that this world is in search of new leadership and is moving out of its comfort zone.
- The pace of mergers and acquisitions activity will likely pick up in 2020 with investment management firms looking to expand their capability by consolidation;
- Leading firms will want to “resonate culturally” with the younger generation of investors, and this may include the introduction or strengthening of environmental, social and governance principles;
- Private equity firms have begun adopting alternative data to decide on their next deals, following in this regard the footsteps of hedge funds and long-only managers;
- Using these alternative data sets for the management and transformation of their portfolio companies will prove to be a “game changer” in the PE space; and
- Leading investment management firms will cross the boundary between old-fashioned cost-efficiency projects and more new-fangled save-to-transform deals.
Looking for New Leadership
It is in this context that, the report says, the boards of public firms with investment management capabilities are on the hunt for new leadership teams that will prove better suited to deliver results in the present “dynamic and complex industry landscape.”
At least 37 CEO positions in such companies in the US and Europe have changed hands since 2017.
The new leadership, once found, might get to work on technology improvements and at right-sizing their own operations, outsourcing non-core functions. These are areas in which, the report says, some firms in the investment management field (a fortunate 25%) have proven clearly more adept than others.
Passive funds have outperformed active funds in recent years and, as one might expect a priori, investment has followed performance. Passive finds have grown in AUM steadily for the last nine years. The competitive threat they pose by is part of the pressure on active managers, and part of the reason why they have been forced to cross outside of their comfort zones.
This uncomfortable but imperative crossing can involve the embrace of new technologies in the search for growth. Alternative data is part of this, as is artificial intelligence.
Four Ways to Grow
Two distinct binary choices yield four strategic quadrants. One choice is whether a strategy involves current or new markets, the other is whether it sticks to existing offerings or entails new products. In the most conservative of these quadrants (current markets and existing products) one can grow by enhancing the customer experience and improving data analytics and technology.
If, though, one’s strategy is to introduce new products in current markets, one can develop permanent capital pools, opportunity zone funds, and thematic funds. Thematic approaches include, for example, funds with a focus on “global challenges including urbanization, health care, and technology disruption.” [In an endnote, Deloitte observes that just in September of this year both Schroders and BNY Mellon expanded their thematic offerings.]
If one’s choice is to bring existing products into new markets, options include the mainstreaming of hedge funds and a tilt toward Asia. Asia has an aging workforce and this increases the demand for reliable investment products.
Finally, in the wild-and-crazy quadrant that combines new products with new markets, there are mergers and acquisitions, and there is vertical integration. Regarding mergers, Deloitte observes that deal flow is strong for acquisitions that are essentially “bolt on.” But mergers of equals have slowed a bit, perhaps out of a growing sense that “desired results are often not achieved due to suboptimal post-merger integration.” Geographically speaking, when European firms are looking for a merger partner or acquisition target, they generally look to Asia. American investment managers look for partners or targets across either of the relevant oceans.
As for vertical integration, the Deloitte report references the recent acquisition of Wells Fargo’s Institutional Retirement and Trust business by Principal Financial. Principal announced on July 1 of this year that the deal had closed for $1.2 billion. Deloitte sees this as a paradigmatic case of “value chain” consolidation.
ESG and Regulation
As noted above, the report mentions early on cultural/generational reasons for the development of ESG standard. Later, though, it develops the regulatory consideration. Especially in Europe, where the EU has recently offered a standard ESG taxonomy and ESG-specific benchmarks, regulatory developments may be the driver of continued growth.