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Crypto investment trends: How alternative investments are diversifying with crypto

No longer just an elusive new trend to watch, crypto and other digital assets are now finding their way into portfolios everywhere, with institutional inventors like hedge funds taking it considerably more seriously than before. More and more asset managers are taking a chance on the likes of Bitcoin and Ethereum, with many seeing considerable success as they deliver substantial returns to clients, who are showing an increased appetite for diversified portfolios that boast digital assets.

We explore the state of crypto investment trends with One River Asset Management president of One River Digital, Sebastian Bea, who discusses One River’s own success with Bitcoin and Ethereum so far, as well as what’s in store for crypto in the near future.

This blog’s insights are based on Episode 17 of our In Conversation with Convergence podcast, hosted by Convergence Co-Founder and President, George Evans. In this episode, George is joined by guest speakers Sebastian Bea from One River Digital and Convergence’s own Adam Safi, who discuss crypto investment trends currently being experienced in the asset management industry, and what influence crypto will have on alternative assets portfolios in the future. Listen via the Convergence website or scroll down to continue reading the blog.

One River Digital’s involvement in crypto so far

Off the back of the conjoining of monetary and fiscal policy in 2020 and the risk of inflation being higher than what may have been anticipated, One River set out to deliver unique diversification opportunities by making its first large digital allocation to crypto in November 2020. Considering how robust the previous cycle of crypto investment was, the initial $600 million allocation, mostly into Bitcoin and some into Ethereum, saw the asset management firm crystallize over a billion dollars of gains to return to their clients.

While 2020 was a notably perilous year for firms and the industry overall, One River’s long-haul funds and trend funds, like their crypto investments, made money, and their alpha products remained durable, allowing the firm to deliver risk mitigation in times of uncertainty. Building on this momentum, the firm started collaborating with other investment firms and getting involved in the crypto community at large, sponsoring a meetup event known as CryptoMondays – a regular get-together for a decentralized global community of people passionate about blockchain and cryptocurrency. now. 

As the industry environment became increasingly decentralized, the adoption of new technology has been vital to the seamless transition to virtual. This has enabled firms to meet the important requirement of data centralization and aggregation and using centralized data formats so that employees can continue to access the necessary information they would typically only get at the office. This ease of access to shared data systems has been key to uninterrupted collaboration and business continuity. 

Crypto is more than a fad 

Once investment fad bubbles “pop” they tend to not come back. But when one considers the history of Bitcoin, it’s had a number of cycles and keeps coming back with new highs each cycle, despite questionable previous cycles. The growing number of Bitcoin wallets each cycle also shows the crypto coin’s growing popularity each cycle, suggesting that this asset class is certainly here to stay.

Although traditional finance investors remain focused on the uncertain regulation, price volatility and lack of identifiable cash flow that surrounds crypto investments, the persistent growth and increasing depth of the Bitcoin network – and therefore blockchain networks at large – is what piques decentralized finance investors’ interests.  

One River’s advice to investors considering this asset class is to consider the resilience of these crypto coins from cycle to cycle and be curious. As FinTech continues to evolve, the money-moving systems we’ve become accustomed to are becoming archaic, and it’s likely that cryptocurrency naysayers will actually look to crypto as a way to solve some of the legacy problems that are emerging in financial services. 

Key crypto fund considerations

When it comes to including crypto in funds, Bea notes that “everything is a little bit more difficult and it takes help, patience and perseverance” to get using this investment vehicle right. What firms cannot overlook is the benefit of great legal advice in this area, as guidance into what you’re doing, who you’re doing it for, what kind of vehicle you’re doing it in, etc. is invaluable, especially when considering possibilities both onshore and offshore and navigating ECI risks. 

While there is a high degree of uncertainty that surrounds trading crypto in a fund, just like in traditional markets, including equity market neutral funds and trends funds trading in futures, if it’s harder to do, then it’s probably worth it on the other side as well. Also, it may take more time than you would expect, but with patience and perseverance, the pay-off can be well worth it.

How traditional market service providers compare to crypto service providers

Unlike traditional markets where service providers are fairly stable, with a good amount of data and history on them available, crypto service providers have less history, are less stable and see more dispersion. Crypto custodians, for example, differ greatly from traditional finance custodians for a number of reasons. As digital bearer assets, crypto custodian processes and costs differ from traditional finance custodians, which stock portfolios usually take for granted, but firms need to think about custody as being vastly more time-consuming and important with crypto assets because of the associated security risks that have to be appropriately handled.

The nature of the assets also changes what firms need to focus on from operational due diligence and admin points of view, as well. For example, if you have a daily fund that runs Monday through Sunday, you need processes in place to take subscriptions or redemptions over the weekend when fiat isn’t flowing. So working through these administrative requirements with your fund administrator is also a key consideration that can differ between traditional and crypto finance funds. 

The state of funds investing in digital assets like crypto

Convergence currently tracks around 1,150 funds with some allocation to digital assets. The three most common fund profiles we are seeing in the market are (1) hedge funds trading or holding digital assets that trade on exchanges, (2) venture funds investing in the equity of digital asset-related firms (and in some cases, receiving tokens as part of their investment) and (3) large, multi-strategy funds looking to diversify and gain exposure to digital asset funds. These reveal that there are a lot of different investment theses surrounding digital assets, and there’ll likely be more as time progresses. 

Looking specifically at Bitcoin, we see some people treating it as digital cash, or a store of value, while others treat it more like a high-growth tech stock. Again, it’s interesting to see so many narratives converge in one asset class, with a number of funds that have come into the market seeing good growth as a result. 

What’s on the horizon for crypto investment trends?

It’s an exciting and critical moment for investing in digital assets, and what’s in store next for crypto investment trends is going to look a bit different from prior cycles. With regulation and use case growth a key focus, future cycles are going to be heavily driven by retail investor behavior, and Bea expects that the next cycle will be the first great regulated cycle for crypto.

More regulation is not just needed but sought out

Institutions like hedge funds losing money are less of a worry to regulators than the financial stability of the markets. Still, there hasn’t been a lot of evidence that the stable coin market at its current size is really driving any question of financial stability today. What the regulators are going to be on the lookout for is any damage done to retail investors. 

Looking at recent examples like Voyager and Celsius, these instances of retail investors being harmed and regulators kicking into action are ultimately constructive, as institutions considering crypto are looking at these as indicators of the regulatory climate that enables them to invest right now into an investment cycle that’s never been seen before. 

There hasn’t been a regulated cycle yet, and there’s a lot of institutional capital sitting on the sidelines waiting to see some common sense regulation in the market today that will protect retail investors that have been previously burned by digital assets. Regulation coming from the CFTC or SEC will be very useful and beneficial to the health of the asset management industry and institutional investors currently navigating crypto investment trends, but always seek out that regulatory overhang before investing.  

Growing use cases for block chain 

While institutions await more regulatory clarity, it’s also important that they see the growth of real-world use cases where blockchain scaling solutions and infrastructure are actually having an impact. The lightning-fast network on top of Bitcoin is an example of this. In cases where the financial system doesn’t work for you, for example, with the high costs of sending money to countries in Central America through Western Union, blockchain systems like Bitcoin make sending money much cheaper and easier. 

Disintermediating these middlemen who make moving money across borders difficult is a use case being seen right now, but institutions need to see more of these real-world cases where the rails of crypto are needed. As more of these use cases emerge, institutions will start to see and appreciate the value of these rails more, and start making digital assets a more concrete part of their funds. 

Convergence League Table Summary

With every episode of In Conversation with Convergence, we report on the findings of the Convergence League Table for that month, tracking and comparing the growth of over 600 fund administrators, 500 audit firms, 300 primes and 1400 custodians servicing the private markets through our comprehensive database. To unpack the highlights of this month’s Convergence League Table podcast, at the time of the July podcast release, the Convergence League Table revealed that between June 2021 and June 2022, funds specifically saw:

  • Overall growth of 11.5%
  • Fund administrators one through five grew at 21% – almost double the market growth, while admins six through 10 kept pace with the market with a growth of 10%, and admins 11 to 25 grew at 18%.
  • In terms of audit firms, the big four saw growth of about 7.3%, while, astoundingly, auditors five to 10 grew at almost 25%, and auditors 11 to 25 grew at 30%, indicating significant growth two to three times that of the market. 
  • Prime brokers one to 10 grew at a little over 4%, 11 to 25 saw growth closer to 7%, and all other primes grew at around 10%, showing a more even year-on-year distribution than with auditors and administrators. 
  • In terms of custodians, the top 10 grew at about 10%, while custodians 11 through 25 actually didn’t see growth, but rather shrank by about 2.5%. All other custodians grew close to 8%, however – an interesting phenomenon indeed.

>> Get access to the Convergence League Table

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The Operational Future of Alternative Investments: Industry Reflections with KPMG

The alternative asset industry has thrived through a remarkable and truly unprecedented period in history. It has adapted well to new working environments, be them remote or hybrid, and has adopted new technologies, digital solutions, data centralization and outsourcing of resources to adapt to a world that changed almost overnight. Even the ways in which we communicate have changed, with the likes of Zoom and Microsoft Teams meetings being preferred over traditional in-person meetings, emails and phone calls.

Indeed, the industry has been extremely resilient to changes in practices like capital allocations and raising, and has innovated to meet investor demands. But how has this resilience influenced how firms operate and will operate in the future? We reflect on how the last two years have shaped the industry and what this reveals about the future of alternative investments. 

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This blog’s insights are based on Episode 16 of our In Conversation with Convergence podcast, hosted by Convergence Co-Founder and President, George Evans. In this episode, George is joined by special guest speakers Joseph Fisher and John Budzyna from KPMG, who discuss their industry observations and what they foresee happening in the industry in the next few years. Listen via the Convergence website or scroll down to continue reading the blog.

The industry at large is seeing a paradigm shift

The last two years have proven that the investment industry is not only agile in its response to unavoidable changes but resilient and very nimble. Overall, industry players were able to recognize critical issues early in a newly decentralized environment and made moves to address them to ensure they didn’t affect outputs or productivity. 

The asset management ecosystem at large has seen ongoing reliance on service providers and consistent collaboration among front and back office personnel, ensuring that the ever-important flow of information is maintained, even virtually. 

How virtualization and decentralization have influenced the industry

Across the entire investment management landscape, investment in technology has been key. From AI tools to the digitally transformed ways in which we reach out to investors, the predominant amount of spend seen at alternative firms recently has been on these technologies, which are among the trends shaping the sector now. 

As the industry environment became increasingly decentralized, the adoption of new technology has been vital to the seamless transition to virtual. This has enabled firms to meet the important requirement of data centralization and aggregation and using centralized data formats so that employees can continue to access the necessary information they would typically only get at the office. This ease of access to shared data systems has been key to uninterrupted collaboration and business continuity. 

The War for Talent and the future of alternative investments

While the adoption of technological innovations has been critical for business continuity amidst the pandemic, it has also resulted in a greater demand for more niche skills, contributing substantially to the War for Talent. For example, the demand for data scientists that can navigate new front office technologies has increased among alternative asset firms. This demand will only grow as the future of alternative investments becomes more technologically complex, and as employees become increasingly specific about the types of careers they want.  

However, there are economical factors that could impact this in the future. If there’s a recession, the pendulum may swing back, and the workforce may see less reshuffling and resignations as employees trade job flexibility for job security. While potentially too early to tell, the future of alternative investments and the talent the industry requires will be heavily dependent on the economy and the changes it may bring to work habits in the near future. 

While the War for Talent has expanded the talent pool for firms beyond geographical boundaries, which has impacted things like firms’ real estate footprints, the key theme for a successful decentralized working environment, both now and in the future, is a well-maintained culture underpinned by continued collaboration. 

How are firms maintaining culture in a hybrid world?

A key question that’s emerged in this changing world is “how does a firm maintain the attributes that made it successful before the pandemic?”. A study conducted by KPMG in conjunction with AIMA found that diluting, or losing, culture in a remote/hybrid environment is a key concern for firms. But the reality is that employees are currently in the driver’s seat, and with a high percentage of staff craving the hybrid environment, firms need to strike a balance to be successful. 

Within the context of the war for talent, culture has been a further concern in that hybrid work now enables firms to access talent in disparate geographical locations, but they’ve needed to weigh up the benefit of this versus insisting on more collaboration and teamwork that enriches their company culture. 

Whatever their approach, if firms are to maintain their culture and continue to thrive in the hybrid model, protocols need to be defined and established. Employees need to be available and reachable during business hours, client needs still need to be met promptly, and communications need to be ongoing. Making efficiency, in the office or at home, an integral part of their culture will be key to firms succeeding while meeting employee expectations. 

Reimagining the investment management operating model for the future of alternative investments

Organizations like KPMG have seen an increase in side letters, transparent reporting, structural variations, fee allocations and changes in how fees are charged. These changes, along with a potential regulatory rework on the horizon, suggest that firms are truly studying their operating models and looking for efficiencies to enable future growth, all while monitoring and protecting their operating margins. 

For investment managers to be successful, they have to have an eye on monitoring and creating efficient operating models to maintain their margins, and this will have a far-reaching impact on the industry and its ability to sustain itself in this new construct. This is true, especially in light of additional factors, like a looming recession, and whether, for example, funds are below their high-water mark currently. These all affect the trajectory of future operating models and how managers are monitoring their operating model risks.

Additionally, firms are going to continue to reevaluate their real estate footprints in light of remote/hybrid working and identify which individuals are core to their operating model, before building their footprint around these factors. This is a chapter on the future of alternative investments, and the industry overall, that’s still being written as firms continue to reestablish normality post pandemic.

Changing investor demands

Equally driving change and growth in the industry is the unparalleled demand for customized portfolio construction from investors. 

Gone are the days of “here’s what I have to offer, join my flagship fund”; investors are being more specific about what they want and the form they want it in.  This could be separately managed accounts, co-investment strategies, particular jurisdictions with particular tax motivations, etc. and all of these create a tremendous amount of operational complexity that can’t be easily scaled. 

Similarly, as a result of the pandemic, new strategies have emerged in the private credit, hybrid, private equity and hedge fund spaces, which had previously not followed a cookie cutter approach in terms of operations anyway. In catering to the demands of the investor, these factors are putting a tremendous amount of pressure on firms’ existing operating models, which will influence how firms operate in the future of alternative investments.

Regulatory headwinds to further impact operations

Perhaps too early to predict, but there have been some prevalent regulatory headwinds that may manifest themselves in the coming months. Developments such as the SEC’s private funds rule proposal, which discusses quarterly statements and disclosures, annual audits, and fairness opinions on secondaries, the dealer rule proposals, and AIFMD amends are all factors that are going to put more stress on the operating model, specifically compliance and operations. 

Environmental, Social, and Governance (ESG) have also taken front and center on due diligence questionnaires, and disclosures need to be able to answer ESG-related questions in a transparent manner. ESG disclosures are prominent in the public sector and will most likely make their way to the private fund world, but for now, they are on almost every deep due diligence questionnaire, and firms need to be mindful of the influence ESG is having on the future of alternative investments. 

Not to be forgotten is crypto, which has found massive popularity in recent years, though currently experiencing a loss of favor. Considering factors like FASB’s moves to establish crypto asset accounting rules, greater governance around crypto is set to take shape in the coming months. 

Conclusion

Whether it’s the adoption of technology post the pandemic, the war on talent, investor tastes, or regulations that are constraining margins, firms need to reassess their business operating models in accordance with the future of the alternative investments industry, to maintain the performance success they’ve been experiencing despite waves of change. 

Moving forward, firms need to take the lessons learned from the pandemic and try to shape a more efficient business operating model that can align with, and help sustain, the future of alternative investments. 

Convergence League Table Summary

With every episode of In Conversation with Convergence, we report on the findings of the Convergence League Table for that month, tracking and comparing the growth of various asset management industry players through our comprehensive database. June’s Convergence League Table podcast, revealed the below findings for the period of May 2021 – May 2022.

In terms of fund administrators:

  • While we saw a fund growth of almost 16%, admins ranked 1-5 increased substantially over that at 25%, showing market-level growth or better
  • Admins ranked 6-10 just about matched fund growth at around 16%
  • Admins 11-25 grew at 21%
  • All other 600+ admins grew at about 5%

In terms of auditors:

  • Everyone except the big four, which grew at about 8%, outpaced the market
  • Auditors 5-10 grew at about 28%
  • Auditors 11-25 grew at around 27%
  • All other auditors came in at around 14% growth 

From a prime brokers perspective:

  • Prime brokers 1-10 grew at a little over 4%
  • Brokers 11-25 saw growth at close 7%
  • All other prime brokers grew at around 13%
  • There’s also a large growth number that’s unattributed to certain primes

In terms of custodians:

  • The top 10 custodians kept pace with the market and saw growth of about 11%
  • Custodians 11-25 fell behind the market with growth of only 1.5%
  • All other custodians saw growth in excess of the market at about 16.5%

>> Get access to the Convergence League Table

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Bullish and Bearish Trends in the Asset Management Industry Identified in the Convergence State of the Union Report

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. 

Jack Phinney No Comments

Key Observations in the Current Illiquid Asset Space

The illiquid asset administration space, like the asset management industry as a whole, is experiencing significant changes in both internal and external factors post-COVID. Internally, a large number of administrators are back in the office full-time and enjoying the all but forgotten benefits of a shared physical space, while externally, trends in fundraising and market performance suggest that although the rest of 2022 may still be difficult for the industry, performance is certainly being maintained.

Here we reflect on our conversation with Matt Lowe for Langham Hall, a long-time Convergence client, and what his fund administration firm’s experience of 2022 thus far tells us about the illiquid asset administration space currently. We also highlight the findings of the Convergence League Table for April 2022 and explore the growth of asset administrators, auditors, custodians and prime brokers between April 2021 and April 2022. 

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This blog’s insights are based on Episode 15 of our In Conversation with Convergence podcast, hosted by Convergence Co-Founder and President, George Evans. In this episode, George is joined by guest speaker Matt Lowe from Langham Hall, who reflects on how the fund administration firm, which specializes in illiquid asset administration, is faring post-COVID. Listen via the Convergence website or scroll down to continue reading the blog.

 

Langham Hall reflections on Q2, and what this tells us about illiquid asset administration in 2022

As a fund administrator with $140 billion dollars of assets under administration across over 450 funds, Langham Hall, a long-standing Convergence client, is a telling example of how fund administrators are re-adjusting to life post-COVID and maintaining performance despite difficult market trends. 

With a sole focus on illiquid assets, including Private Equity, Real Estate, Debt, Infrastructure and Venture Capital funds, Langham Hall’s strides in this space in 2022 indicate specific industry-wide happenings worth knowing about as the asset management industry sees out the remainder of 2022. 

Steady growth among existing and new clients

Despite the uncertainty of the last two years, Langham Hall has seen steady business growth across both existing and new client verticals in 2022. Interestingly, within Langham Hall and the industry at large, fund administrator clients are launching new funds faster than before, across jurisdictions, including the US, Europe, and Asia. This has fortunately led to steady growth for the firm and shows a much-needed swing back to normalcy after the pandemic.

Winning the war for talent 

This growth has, of course, resulted in the need for increased hiring for Langham Hall, which has managed to balance the pace of growth and client onboarding with the pace of hiring, despite the labor market’s continued struggle to find and place top talent in the industry. 

Langham Hall’s approach to hiring is a fine example of how to economize on high-quality talent, leading to impressive retention numbers. The firm maintains a focus on training recruits properly and setting them up for success, which invariably leads to a positive impact on both internal team dynamics, efficiency and morale, as well as client satisfaction. 

Langham Hall has fared better in the war for talent than many firms in the market, which continue to struggle with decreased headcount numbers after the wave of resignations that hit the industry during COVID. However, this strong focus on priming employees for success is paying off, and as the industry continues to adjust, bringing talent retention to the forefront of the agenda can help bring staff numbers up again. 

Remembering the value of working from the office

No industry was immune to the widespread lockdowns experienced globally during COVID, and although remote and hybrid work set-ups have gained in popularity, firms like Langham Hall are recounting the benefits of teams working together in a shared office space.

Even during COVID, Langham Hall’s management strived to ensure all offices, across locations, stayed the same course and remained like-minded, even when different jurisdictions were affected in different ways. Although this helped to ensure business continuity, the firm did discover, like many others, that learning slows down when teams are physically detached, and fully remote is not beneficial to both clients and teams alike.

As such (and indicative of an industry-wide trend), Langham Hall has maintained a preference for in-office working, and their goal is to continue to work from the office full-time. However, it’s important to note that the firm has made a point of emphasizing to its team that in-office work is about more than in-person face time – it carries with it real benefits for both individual growth and success within the firm, and for team-wide efficiency overall, including better collaboration and training, and faster learning.

Maintaining a continued emphasis on flexibility 

What has definitely supported the firm’s return to the office with minimal pushback from the team, is Langham Hall’s existing culture of flexibility. There is a difference between working remotely and true flexibility, and even prior to COVID, the firm prioritized flexibility and continues to take it very seriously. This has helped with the move back to the office, as teams know that the flexibility to meet personal obligations is there when they need it, regardless of working full-time from the office again. 

Similarly, at Convergence, we have found that having every teammate at the office simultaneously leads to maximum exposure and connection, and has positively impacted our team dynamic. While we currently follow a hybrid model and also offer full flexibility, we encourage all our people to be in the office on the same days, not merely to tick a “work from office day” box, but to really benefit from the time of shared in-person collaboration, even though the world at large finds itself at the beginning of a very different way of working. 

Key market trends currently affecting illiquid asset administration

2022 has been a challenging year so far for the markets, and assets have remained down despite widespread efforts to get market performance up again. Instances like these have quite the knock-on effect for fund administrators as expenses can increase, or not change at the same pace as asset values, leading to quite the balancing act on the part of administrators. This is also affected by the growing trend to outsource support for firms that are tending towards self-administration. 

Below are the key observations by Langham Hall of how the current volatility of the market and the downward spiral being experienced by the industry overall, are affecting illiquid asset administration in 2022. 

The fundraising environment is thriving despite market volatility 

The US in particular is experiencing considerable market volatility, with threats from the Federal Reserve of a forced recession at some point to get inflation under control. However, despite trepidation for the future, Langham Hall’s clients specifically have not been too adversely affected.

In fact, in the fundraising environment, more fund managers are coming back into the market than before, and more quickly. Langham Hall has seen clients raise funds, do final closes and get back in with other funds at speeds not seen before. This fast turnaround time is unlikely to be a short-term trend, but rather the way of the future.

However, market volatility is still a concern, and fortunately for fund administrators like Langham Hall, thoughtful preparation appears to be the current game plan for fund managers, and this planning for future volatility puts fund administration in a good position for now. 

Interesting developments among Limited Partnerships

Another interesting trend being seen is among Limited Partnerships in the industry. Looking to leverage good opportunities to the fullest, Limited Partnership capital is being allocated earlier, with some LPs having already allocated all capital for 2022 in April, and others already allocating for 2023. In fact, some LPs are now looking at up to 15 funds a day, compared to an average of five previously.

While this has increased competition among existing and new funds, this trend should trickle down to the illiquid asset space and have a positive impact on both how these assets are managed and administrated.  

Convergence League Table Summary

With every episode of In Conversation with Convergence, we report on the findings of the Convergence League Table for that month, tracking and comparing the growth of various asset management industry players through our comprehensive database. To unpack the highlights of this month’s Convergence League Table podcast, at the time of the May podcast release, the Convergence League Table revealed that between April 2021 and April 2022:

  • Assets grew about 16%
  • Fund Administrators in positions one through five in the league table grew at about 25%, six through ten grew at only 11%, and 11 through 25 grew at almost 24%. Compared to the market growth during this period of 16%, admins one to five, and 11 to 25, significantly outpaced the market.
  • In terms of Fund Auditors, the big four saw growth of a little over 7%, compared to 16% growth for the industry, and auditors five through ten grew a stellar 29%, while Auditors positioned 11 to 25 grew close to 27%. This reveals that new businesses and funds that are appreciating saw the bulk of this growth during this period in comparison to established funds in the top four positions. 
  • Looking at prime brokers, the primes grew at about 15% in the given period, with prime brokers in positions one through ten grew at about 3.2%. Prime brokers 11 through 25 grew close to 7%, and those in positions 26 and above grew close to 14%, revealing that most business during this time went to prime brokers positioned 11 through to 25 plus. 
  • In terms of custodians, fund growth over the period came in at about 14.5%. Custodians positioned one through ten grew 11%, custodians positioned 11 to 25 grew only a little over 1%, and all other custodians from position 26 onwards (of which there are 1,400 servicing the SEC-registered market) grew close to 17%. While the top 10 held their own in the period, what this growth distribution reveals is that business is moving down the ranks significantly, resulting in a fair amount of growth for custodians in position 26 onwards. 

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George Evans No Comments

Three dominant trends in asset management to know about in 2022

Post COVID, businesses across industries are seeing new trends emerge that are influencing operations and challenging them to reassess how they do business. This is true for the asset management industry, too, where, even though growth has been sustained, ways of working have been disrupted.

We take a look at the top emerging trends in asset management, and how FinTechs are supporting firms in effectively managing these trends to ensure they keep ahead of growing demands. We also unpack the findings of the Convergence League Table for March 2022 and explore how the top 25 asset administrators, auditors, custodians and prime brokers have fared in terms of industry growth. 

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This blog’s insights are based on Episode 14 of our In Conversation with Convergence podcast, hosted by Convergence Co-Founder and President, George Evans. In this episode, George is joined by guest speaker Anup Kumar from Linedata, who discusses three trends currently being seen in the asset management industry, and how firms are dealing with these. Listen via the Convergence website or scroll down to continue reading the blog.

The industry post-COVID and the dominant trends in asset management that are emerging

COVID had a massive impact on the way businesses do business, particularly in terms of their infrastructure and whether it is sufficient for business continuity in the face of disruptions. Both in terms of infrastructure, but also in general, there has been a noticeable increase in outsourcing. This increased traction in outsourcing is also thanks to the need for specialized resources. Post COVID, the talent management spectrum is facing challenges attracting and maintaining talent, especially specific specializations that are becoming more difficult to find and retain. This is just one of the challenges businesses are attempting to address through outsourcing.

Overall, businesses are needing to reassess what they’ve built and what they want to continue to do themselves versus what they need to invest in to continue thriving. And with the emerging trends starting to be seen post-COVID, it’s an interesting time in the asset management industry with new, sophisticated solutions being sought out.

Increasing back-office complexities 

Fortunately, the private credit space is seeing a lot of growth, and assets under management in the market are expected to rise to $1.5 trillion by 2025. However, with explosive growth and the inherently bespoke nature of the industry, where every deal is customized, the back-office function is seeing increased complexities. 

Although businesses, like Bright Credit, pride themselves on providing customized credit arrangements, it’s become apparent that inefficiencies from a technology perspective are making scalability difficult, which is making meeting rising demand a challenge.  

Use of technology like artificial intelligence and machine learning in the back-office and IT operations has been slow, which has made things more difficult for analysts. Instead of focusing on investment decisions and monitoring investment performance, analysts have had to spend more time on administrative activities, particularly collecting, ingesting, normalizing and validating data for use by limited partners. 

Back-office functions like valuation processing or loans administration, as a result, have become more complex, and businesses require specialized resourcing and skills to manage, again, contributing to the increase in outsourcing solutions. 

Increasing cybersecurity concerns

Since the start of COVID, cyberattacks have increased 700%, and 80% of those attacks originate at the end points. Within financial services, the buy side industry is notably more susceptible to cyberattacks and a soft target for cyber criminals. As such, there is increasing interest from regulators like the SEC in how asset management and buy side firms are dealing with the threat of cyber attacks and the security processes and controls they have in place. 

This, too, is an area firms are outsourcing support for, with FinTech firms now offering full-service threat management solutions. This threat intelligence is being leveraged to protect infrastructures and endpoints, to help asset management firms stay ahead of cyber threats. Additionally, many firms are also looking to leverage these solutions for cyber policies, to ensure controls are sufficient for regulatory requirements.

Talent acquisition and management challenges

As mentioned, it’s become increasingly difficult to find good resources in the asset management space. With the so-called ‘resignation tsunami’ the industry is facing, finding and retaining specialized talent is becoming harder, and firms are needing to carefully navigate the future of work and how to handle concerns around remote or hybrid work constructs, while best meeting employee expectations.

From a policy point of view, the industry in general is responding positively and being more flexible and adaptive in policies. Despite this, the growth the industry is experiencing, paired with the high number of resignations being seen, talent management still continues to be a challenge, and losing key resources poses great operational and reputational risk.

Many firms have needed to slow down operations in order to work out what mechanisms to put in place to manage changing capacity. And because technologies like AI continue to see slow adoption, and functions like loan administration continue to be time-intensive, firms are needing to think of different operating models and approaches to ensure they keep scaling as needed to meet industry growth demands. 

Operating as an extension of clients’ operations

To meet the needs that come with these emerging trends in asset management, FinTechs are offering solutions that mimic client controls and processes and augment transformative technologies into those they already have in place. What this does is give clients a sense of operational control they would otherwise only achieve internally, because their solutions providers are now operating as an extension of their business, not as a “ticket it or leave it” type of service provider typically seen with third-party providers.  

Having a service provider operate under the same common operating leadership and setup, processes and control mechanisms allows businesses to hand off intensive work, like running capitalization tables, for more efficient management. Depending on a business’ unique needs, different degrees of support can be provided, but more effective, current day solutions are being implemented to make the separation between client and service provider less apparent from an operational perspective. 

Convergence League Table Summary

With every episode of In Conversation with Convergence, we report on the findings of the Convergence League Table for that month, tracking and comparing the growth of various asset management industry players. To unpack the highlights of this month’s Convergence League Table podcast, as at the time of the April podcast release, the Convergence League Table revealed that:

  • Overall, administrators growth from March of 2021 to March of 2022 was about 15.3%
  • In terms of administrators, admins ranked 1 to 5 grew at about 19.5%, admins in positions 6 to 10 registered the highest assets under administration growth at 26.5%, and admins in positions 11 to 25 grew at about 25%. Interestingly, all other admins positioned 26 and higher, only grew around 4.5%
  • Looking at auditors, auditors in positions 1 to 4 grew at about 8.5%, and positions 5 to 10 grew over 19%. Auditors in positions 11 to 25 grew almost 29%, which is almost three times the market growth!
  • Custodians greater than the top 25 registered the highest assets under custody growth, showing an industry growth of around 16% year over year. The top 10 custodians grew at about 14.25%, while the custodians ranked 11 to 25 grew at about 13.25%. From position 26 on, of which there are 1 400 custodians listed, custodians grew at about 31%
  • In terms of prime brokers, those greater than position 25 registered the highest growth in the number of funds, showing, on a fund basis, market growth of about 14.65%. Prime brokers in positions one through 10 grew at about 4%, while those in positions 11 to 25 grew at about 6.5%. All the primes grew a little above the market at about 15.5%, effectively outpacing the market.

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Jack Phinney No Comments

Convergence CEO John Phinney at the Intertrust Private credit growing pains – a practitioner’s discussion

, Founder and CEO of Convergence Inc, joined other industry experts in exploring Private Credit Growing Pains: https://lnkd.in/gWvPrZ-K

Jess Larsen, CEO, Briarcliffe Credit Partners
Drew Phillips, COO, Atalaya Capital Management
Jonathan White, Global Head of Fund Sales, Intertrust Group

 

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