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.
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.
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%