Global alternative assets will increase to US$15.3 trillion by 2020, predicts a report by PwC. In the lead up to this milestone, the global alternative asset management industry is expected to experience a period of transformation as players calibrate their business and operations and make technology a top investment priority.
The principal focus for many firms will shift to creating a broader asset class and product mix and accessing new distribution channels.
While some firms still strive to become more institutionalized, leading players will work to build industrial-strength operational platforms. They will meet this challenge by revamping their business and infrastructure to be more agile, durable and scalable, with a high degree of efficiency and operating leverage.
Assets under management in South America, Asia, Africa and the Middle East (SAAAME) are set to grow faster than in the developed world. According to PwC, this growth will be exemplified by the growth of sovereign assets and the projected emergence of new Sovereign Investors, the vast majority of which will originate from SAAAME. The largest increases in allocations will likely be in private equity, real estate and infrastructure.
Says Mike Greenstein, PwC’s Global Alternative Asset Management leader: “The shift in global economic power from developed to developing regions will drive continued focus on sovereign investors, fast-growing institutions and the emerging middle classes in new markets. These groups of investors will increasingly seek branded multi-capability firms. Currently, a number of alternative firms exist in this category. Others will aspire to join them.”
PwC predicts that in response to this growth, alternative firms and the traditional firms looking to enter the alternatives sector will pursue one or more of three possible growth strategies; building, buying or borrowing expertise that they do not currently have in-house.
The builders will look inwardly for growth, leveraging their existing capabilities and talent while the buyers will look to acquire talent, track record and scale overnight. The borrowers will achieve their growth strategy by partnering with other financial institutions to expand their capabilities and distribution channels.
The report predicts alternative managers will develop more sophisticated market strategies, more focused distribution channels and better recognised brands. Many firms will devote more resources to deciding which investor channels they want to play in, how profitable each of those channels are and how to optimise their chosen channels.
PwC expects alternative asset managers to continue to move into areas traditionally dominated by banks, such as lending, securitization and financing as the funding gap continues to present new opportunities to them. Others will create partnerships with banks and the largest institutional investors, providing integrated expertise in managing new asset classes and building customized products. At the same time, they will respond to the demand from investors for standardized products in the form of liquid alternatives and other permanent capital vehicles.
Historically, investment in technology has not been a top priority for many alternative firms. However, all this will change, according to the report. The next five years will see it become mission critical in driving investor engagement, data-informed decision making, operational and cost-efficiency, and regulatory and tax reporting. By 2020, the shift to data-informed decision-making will lead to improved organizational designs that can make more effective use of third-party administrators, other business process outsourcing firms, and other vendors to achieve operational and cost efficiency.