Alternatives Industry Diversity & Asset Management 2020: Fast Forward To Centre Stage by PWC
Introduction
Over the past several years, rapid developments in the global economic environment have pushed asset management to the forefront of social and economic change. The need for increased and sustainable long-term investment returns are an important part of this change and has propelled alternative asset management to centre stage.
Alternative firms, with their emphasis on investment outcomes rather than products, and specialization rather than commoditization, will increasingly attract investors seeking customization, diversification and genuine long-term alpha. At the same time, alternatives will increasingly occupy a prominent allocation in the world’s economies, both established and emerging. Fast-forwarding to 2020, alternatives will have a centre stage role to play in the investment universe and in the global economy.
Between now and 2020, alternative assets are expected to grow to $13.6tn in our base case scenario and to $15.3tn in our high case scenario. High performance of capital markets driven by accommodative monetary policies and stable GDP growth would push alternatives towards the high case scenario. However, the possible rise of interest rates in the US and Europe, coupled with a normal correction in the capital markets, would support the base case.
From now until 2020, the alternative asset management industry will experience a period of transformation as firms look to calibrate their businesses and operations as they move to centre
stage. The principal focus for many firms will shift to creating a broader asset class and product mix and opening new distribution channels. While some firms still strive to become more institutionalized, the leading firms will work to build industrial-strength operational platforms. They will meet this challenge by revamping their business and infrastructure to be more agile and scalable, with a high degree of efficiency and operating leverage.
Neither regulation nor investor expectations are, of course, a ‘done deal’. Both will still have a major impact and produce some significant challenges as well as opportunities in the years to 2020. But leading alternative firms will, in the coming years, shift focus and invest more time and resources on business strategy, organizational design and data-informed decision-making.
Unfocused approaches to all will be increasingly rare.
The diversity of the alternatives industry may mean that measuring business unit and product profitability is not practical for all firms, but firms will need to be increasingly systematic and granular in their analysis of opportunity versus cost. This shift will not come easily to all firms in the sector, some of which pride themselves as being artisanal.
But the majority, by 2020, will see the virtues of becoming fitter for growth, agility and profitability.
Executive summary
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.
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 take advantage of broadened distribution channels. These ‘borrowing’ relationships include, but are not limited to, distribution arrangements, joint ventures and sub-advisory relationships.
More standardization, more customization
The polarization of the alternatives industry into standardized and customized 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 customization 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 standardized formats as some institutional investors, as well as the mass affluent and newly wealthy, seek easy access to alternative strategies.
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 institutionalized 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 labor-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-today operations. Firms will also seek to better control operational risk, systematically identifying, prioritizing and managing operational risks to target areas of potential vulnerability.
The right resources in the right places
By 2020, the shift to data-informed decision-making will lead 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.
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