Rebooting the global asset management industry

Rebooting the global asset management industry 29 This imperative has come to the fore in the emerging tech-driven ecosystem, in the pursuit of two goals. The first is to break down the prevailing silos in data management ahead of the great wealth transfer. The second is to expand digital capabilities to turbo-charge operations and enter newmarkets by democratizing access to all manner of fund products. Assisting this process is the continuing rise of D2C distribution platforms, such as Robo Advisors (44%), as digitally savvy investors will likely reshape service demands. Exceeding their expectations is vital for success. With consolidation, ever more asset managers will have the critical mass of assets to run proprietary platforms. Yet another manifestation of horizontal integration is the expected rise of decentralized finance (DeFi) platforms (34%). They seek to digitize real world assets such as stocks, bonds, real estate and private equity and convert them into tokenized assets that can be traded or borrowed using blockchain technology. They offer two advantages: enhanced liquidity and reduced friction costs arising from high fees for intermediaries and long transaction settlement times. As blockchain technology matures, such platforms will likely attract rising participation by institutional investors. However, alongside vertical and horizontal integration in the value chain, greater geographical divergence is expected between the U.S. and the rest of the world (40%). The import tariff policy of the new administration risks fragmenting the global economy into trading blocs around the two economic superpowers: China and the U.S. This may well see greater economic convergence among trading nations outside the U.S. (46%). It is also expected to reduce the attractiveness of U.S. assets as well as their correlations with non-U.S. assets. Digitally savvy investors will likely reshape service demands. Exceeding their expectations is vital for success. Insights Consolidation is about economies of scope as well as scale Consolidation in the private equity space has shot up in this decade. At this rate, some 11,000 players of varying sizes may coalesce around 100 mega ones. Our shareholders expect us to increase fee-bearing assets under management by over 15% a year. To meet this stretch target, we have relied on a mix of organic growth, acquisitions and strategic partnerships. Our organic growth relies on improving the operational acumen of companies in our portfolios. Since the 2008 financial crisis, our industry has relied heavily on market appreciation to drive bottom-line growth. Instead, we built a portfolio of companies with transformational potential and delivered an annual IRR of nearly 20% across most vintages. We managed to enlist some premier pension plans as co-investors, thus enhancing our global brand. We have completed numerous acquisitions, partly to improve our scale and client reach, but mainly to enhance the scope of our product base by having the necessary skills and capabilities in private debt, real estate and venture capital. As for strategic partnerships, these have involved two sets of players. One is public market players keen to have illiquid assets in their multi-asset class funds. Another is service providers to whom we have outsourced some of the activities in the middle and back offices. Yet another has involved start-ups and scale-ups with talent and technology that can speed up product development and market roll-out. That leaves us to focus on what we are good at. That is the hallmark of the PE industry as it enters a new era where leverage is expensive, dry powder is at its all-time high and exit options are limited. A Canadian private equity manager “Operational alpha via the outsourcing of front, middle and back offices is the new mantra.” “We need to cut our costs by 20% and generate at least 30% of revenue from higher margin products to remain competitive.” Interview Quotes