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As the private fund industry continues to recover post-pandemic, new and evolving trends are revealing how much things have, and continue to change. Both optimistic bullish trends, indicating confident growth, and bearish trends, indicating hesitance and shortcomings, can be identified across the asset management industry. For private funds, advisers, administrators, custodians, and service providers alike, it’s worth identifying and taking heed of these bullish and bearish trends across the industry, to get a sense of what the short to medium term may look like. 

In our annual State of the Union Asset Management Industry Research report, we take a holistic look at the industry and the key trends that have impacted it over the last year. We compare performances from 2020 and 2021, and note which bullish and bearish trends have arisen that private funds need to know about.

If you’d like to download the full report, scroll down and complete the form at the bottom of the page. Otherwise, keep on reading as we unpack just some of the key trends we’ve discovered. 

Bullish trends in asset management worth knowing about

In light of the recent market downturn, there are strong and bullish trends in private asset management that can be telling of the future of the industry. Here are four of the bullish trends we’ve identified that have emerged in the private fund industry between 2020 and 2021.

Private Funds, Advisers, and Assets are growing

The number of private funds, private fund advisers, and private fund assets has seen considerable growth since 2019. At the end of 2021, there were 131,569 private funds, 13,028 fund advisers, and $28.9 trillion in private fund assets on record. 

In terms of private funds, this is an increase of 19.8% compared to 2020 and 7.1 points greater than its 3-year CAGR of 12.7%, and private assets increased by 19.8% over 2020, or 4.9 points greater than its 3-year CAGR of 14.9%. Fund advisers saw a net increase of 1,219 – an increase of 10.3% over 2020 and 3.1 percentage points higher than its 3-year CAGR of 7.2%. Worth noting in relation to this trend is new advisers are more likely to outsource services and create significant new business opportunities for service providers.

These increases across the private funds segment indicate a Bullish trend, and in light of this data, service providers should be considering key questions, including:

  • Did I know about these funds and did I have a chance to bid on them?
  • How many of these funds launched and advisers created were by previously existing clients and non-clients?
  • What were the primary investment strategies of these advisers?
  • Do I have the products and services needed to support the business of these new advisers?
  • How much of the increase in client assets was driven by new money coming into existing funds?
  • How much of the asset increase was driven by market performance and leverage?

Private Funds Outsourcing is rising, reducing non-investment related expenses

The trend to outsource private funds continues, indicating another Bullish industry trend worth bearing in mind in the coming years. The funds currently outsourcing the most are securitized asset funds at 88%, Hedge Funds at 87%, Private Equity Funds at 58%, and Real Estate Funds at 57%. Interestingly, hybrid funds have bucked the trend, with only 74% of funds outsourced in 2021, down 1% from 2020. 

However, with advisers performing fund administration in-house (the self-administration market), growth opportunities for fund administrators have narrowed. This will intensify competition for new fund launches and magnifies the importance of winning funds from existing clients. In light of this, we suspect that this will create opportunities for fund administrators who can differentiate themselves by offering a broader set of outsourcing services to Advisers. Once Advisers outsource traditional fund administration, they often look to outsource other aspects of the 11 non-investment activities that they all perform – a prime opportunity for fund administrators. 

It’s worth noting that the non-investment staff support ratio declined from 1.29 in 2019 to 1.24 in 2020, and then to 1.18 in 2021. This Bullish trend indicates that outsourcing is helping Advisers focus their hiring efforts to investment staff specifically – a move being seen industry-wide as firms increase recruiting efforts again. 

A decreasing number of non-investment professionals are being hired

Looking now to non-investment professionals who perform non-investment related activities, including operations, fund accounting, technology, compliance, tax, marketing/investor relations, human resources, fundraising, risk management and facilities management activities. The industry finished 2021 with 205,944 non-investment professionals – a net increase of 9,236 (or 5%) over 2019, and 3% higher than 2020. The 2021 growth, however, is 2% lower than the 3-year CAGR of 5%, suggesting a consolidation trend in the industry, influenced by the Bullish outsourcing trend that continues to grow among firms. 

In 2021, the single largest year of improvement to fund productivity, total non-investment staff per fund declined from 1.70 to 1.48, a productivity gain of .22 non-investment staff per fund, representing a 12.9% improvement over 2020 and an 18.2% improvement over 2019. This suggests an improvement in industry profitability driven by productivity increases in the investment headcount per fund.

In terms of the non-investment staff support ratio, there was a decline of .11 heads between 2019 and 2021. In 2020, the ratio declined from 1.29 in 2019 to 1.24, and then a further decline was seen in 2021 with the ratio dropping to 1.18, or 4.8%. This Bullish trend further indicates that Advisers are focusing more on hiring investment staff, with fewer non-investment staff to support them, signaling that outsourcing of the 11 non-investment activities is indeed on the rise.

 

Increases in productivity are driving industry profitability

Productivity gains and losses directly impact industry profitability, and productivity is most heavily influenced by headcount, which accounts for roughly 67% of industry spending. Considering this, and to evaluate industry-wide, segment, and manager-level productivity, we at Convergence developed Operating Efficiency Measures for our research methodology. 

Our approach has revealed that in 2021, the total FTE per private fund declined from 3.07 to 2.73 – a productivity gain of .34 FTEs per fund, representing an increase of 11.1% compared to 2020, and 15.21% compared to 2019. With the single largest year of improvement being 2021, this Bullish trend suggests productivity increases are in turn driving industry profitability increases. 

Operating Efficiency | Private Funds per FTE

Operating Efficiency | Private Funds per FTE

Notably, the ratios of investment-to-non-investment headcount per fund have never been closer. Non-investment headcount per fund is only .23 heads greater than investment professionals per fund, a Bullish trend suggesting that productivity increases that have reduced numbers of non-investment staff needed to support investment staff are driving industry growth. We expect that parity between headcounts will be reached over the next two to three years as the outsourcing trend in non-investment activities noted above continues to rise.

Bearish trends in asset management worth knowing about

Following the impact of the pandemic and other industry developments, bearish trends are to be expected. However, some are more worrisome than others, specifically pertaining to ESG-related activities. Below we discuss three of the bearish trends in the industry that our research has uncovered. 

Complexities around increasing Operating (Non-Investment) Risk

Investment complexity, cyber threats, and increased regulation have contributed to increasing industry risk. Investment complexity is increasing because generating investment alpha has become more difficult as more managers enter the market, and their ability to generate quality investment ideas diminishes. Cyber risk continues to grow daily and the pace of private fund regulation has clearly accelerated.

At the end of 2021, the industry saw 1,277 private fund managers with higher levels of operating risk – an increase of 71, or 5.9%, when compared to 2020, and 2.8 percentage points higher than the 3-year CAGR of 3.1%. To contextualize, 279 existing managers and 22 start-ups were added to the high-risk category, while 197 existing managers moved to lower risk categories and 33 managers went out of business entirely, indicating a bearish trend for the industry. 

The actions required to manage these risks can lead to new cross-selling opportunities for service providers to help implement the control environment needed to support growth and manage risk. As such, service providers and investors need to identify which of their clients and investee managers are incurring higher operating risk, learn which factors are driving these risks, measure the severity of the risk and potential risk of financial loss, and determine the steps necessary to manage the risk.

Increasing regulation and compliance stress

Driven by increasing regulations issued by the SEC and global regulators, compliance stress across the industry is rising. In terms of our research methodology, Convergence measures compliance stress by measuring and tracking the quality of regulatory filings. 

At the end of 2021, there were 809 global regulators overseeing the private funds industry; an increase of 118, or 17%, compared to 2020. This is a Bearish trend for managers and investors, as it will increase both the cost of doing business and the risk that the manager fails to meet their compliance requirements. However, this is a Bullish trend for compliance service providers, as the increase in regulators is driven by 165 newly disclosed regulators, which will result in increased compliance pressure for funds. 

As with the increase in operating risk, service providers and investors need to identify which of their clients and investee managers are incurring compliance stress, learn which regulatory factors and filings are driving these risks, measure the severity of the risk and potential risk of financial loss, and determine the steps to take to manage this compliance risk effectively.

Stagnating industry gender diversity and ESG efforts

The percentage of women holding Key Control positions at the end of 2021 increased by .3 points to 19.27%, up from 18.97% in 2020. This, however, is 0.5 lower than its 3-year CAGR of 0.8%. This Bearish trend, influenced by the disproportionate number of women that left the industry in response to the pandemic, reveals that the Diversity, Equity, and Inclusion (DEI) aspect of the “Social” pillar within the Environmental Social and Corporate Governance (ESG) compact is lacking, and requires immediate redress by all constituents in the asset management industry. In very direct terms, direct and immediate actions must replace the words which, for two decades, have yet to move the DEI needle.

Funds need to measure and examine the differences between ESG investment and their own business management practices, as well as the differences in hiring practices across different leadership functions and in the hiring of existing and new asset managers, to identify room for improvement in their DEI efforts.

Summary: Uncovering key data insights is the first step in preparing yourself for the asset management industry of tomorrow

Our research has revealed some key bullish and bearish trends in the industry, beyond what’s been explained above, and indicates that while certain instances of growth are to be embraced, there are other areas of concern that need to be addressed. Although private funds, advisers, and assets are seeing an uptick in numbers, the pressures that come with cyber threats, increasing regulation, and poor ESG performance need a comprehensive plan of action to manage effectively. 

Every industry is susceptible to happenings both within the industry itself, and externally on a global scale. This is particularly true for the asset management industry, and while nothing is certain, the insights we have available today can help us prepare more efficiently for the future.

By leveraging data and data-backed research like Convergence’s State of the Union Asset Management Industry report and our other data sets, industry players can gain valuable insight into the industry of tomorrow, and make the necessary changes and plans to thrive accordingly.

Get your copy of the Convergence State of the Union Asset Management Industry Research Report

To see the full State of the Union report, complete with performance graphs and more detailed findings, submit the form below and you will be contacted in order to receive a copy of the Convergence State of the Union Asset Management Industry Research Report. 

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