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Over the past several years, rapid developments in the global economic environment have pushed asset
management to the forefront of social and economic change. An important part of this change – the need
for increased and sustainable long-term investment returns – has propelled the alternative asset classes
to centre stage. To help alternative asset managers plan for the future, we have considered the likely
changes in the alternative asset management industry landscape over the coming years and identified
six key business imperatives for alternative asset managers. We have then examined how managers can
implement and prosper from each of these six imperatives.
Alternative asset
management 2020
Fast forward to centre stage
Report
www.pwc.com/alts2020
2 PwC Alternative Asset Management 2020
3 PwC Alternative Asset Management 2020
Contents
Introduction 4
Executive summary 6
The alternative asset management 10
landscape in 2020
Here’s how 12
Conclusion 34
Contacts 35
4 PwC Alternative Asset Management 2020
Introduction
Over the past several years, rapid developments in the global economic environment have pushed asset
management to the forefront of social and economic change. The need for increased and sustainable
long-term investment returns are an important part of this change and has propelled alternative asset
management to centre stage.
Alternative firms, with their emphasis on investment outcomes rather than products, and
specialisation rather than commoditisation, will increasingly attract investors seeking customisation,
diversification and genuine long-term alpha. At the same time, alternatives will increasingly occupy
a prominent allocation in the world’s economies, both established and emerging. Fast-forwarding to
2020, alternatives will have a centre stage role to play in the investment universe and in the global
economy.
Between now and 2020, alternative assets are expected to grow to $13.6tn in our base case
scenario and to $15.3tn in our high case scenario. High performance of capital markets driven by
accommodative monetary policies and stable GDP growth would push alternatives towards the high
case scenario. However, the possible rise of interest rates in the US and Europe, coupled with a normal
correction in the capital markets, would support the base case.
Figure 1: Alternative assets in USD tn
= CAGR
16
15.3
13.6
14
8.1% 9.9%
5.0
12 6.9%
4.6
28.5%
10
7.9 2.9
8 2.5
26.5% 6.6% 6.9%
5.3 2.9
6
17.0% 9.5% 8.9%
4 2.0 1.4
37.9% 6.3% 8.8% 7.4
2.5 6.5
0.8
2 1.0 3.6
0.5 2.5
0 1.0
2004 2007 2013 2020 2020
(Base case) (High case)
n Private Equity n Real Assets n Hedge Funds & FoHF
Source: PwC Market Research Centre analysis based on Prequin, HFR and Lipper data.
5 PwC Alternative Asset Management 2020
From now until 2020, the The diversity of the alternatives
alternative asset management industry may mean that measuring
industry will experience a period business unit and product
of transformation as firms look profitability is not practical for all
to calibrate their businesses and firms, but firms will need to be
operations as they move to centre increasingly systematic and granular
stage. The principal focus for many in their analysis of opportunity
firms will shift to creating a broader versus cost. This shift will not come
asset class and product mix and easily to all firms in the sector, some
opening new distribution channels. of which pride themselves as being
While some firms still strive to artisanal.
become more institutionalised, the
leading firms will work to build But the majority, by 2020, will see
industrial-strength operational the virtues of becoming fitter for
platforms. They will meet this growth, agility and profitability.
challenge by revamping their
business and infrastructure to be
more agile and scalable, with a high
degree of efficiency and operating
leverage.
Neither regulation nor investor
expectations are, of course, a ‘done
deal’. Both will still have a major
impact and produce some significant
challenges as well as opportunities
in the years to 2020. But leading
alternative firms will, in the coming
years, shift focus and invest more
time and resources on business
strategy, organisational design and
data-informed decision-making.
Unfocused approaches to all will be
increasingly rare.
6 PwC Alternative Asset Management 2020 Executive summary Choose your channels Alternative firms by 2020 will adopt world-class ideas and practices from the broader financial services industry and from traditional asset managers. They will develop more sophisticated market strategies, more focused distribution channels and better recognised brands. Most alternative firms will work out exactly which investor channel or channels they want to target and develop relevant strategies and products. Some will focus more systematically on sovereign investors, pension funds, other sophisticated institutions and private wealth markets. Others will target emerging markets, and still others will pursue the potentially huge asset flows through liquid alternative products. A small number of mega-managers in the alternatives space will operate across all major geographies, channels and strategies. Build, buy or borrow Greater segmentation of investors will, in turn, drive greater segmentation of the managers themselves. Deciding which segment of the market to inhabit will require alternative firms to more consciously evaluate what they are as an organisation and where they want to be. They will typically aspire to be one of the following types: diversified alternative firms, specialty firms or multi-strategy firms. All these models exist today; the difference is that firms will by 2020 explicitly choose a growth strategy in order to remain competitive. To develop the chosen business model, firms will pursue one or more of three growth strategies: building, buying or borrowing. Builders grow by building out their internal organisations, leveraging and developing their existing capabilities and investment talent. Buyers expand their alternative capabilities across asset classes and strategies by acquiring talent, track record and scale overnight. Borrowers partner with other institutions, including asset managers, wealth managers, private banks and funds-of-funds, to expand their investment capabilities and take advantage of broadened distribution channels. These ‘borrowing’ relationships include, but are not limited to, distribution arrangements, joint ventures and sub- advisory relationships.
7 PwC Alternative Asset Management 2020
More functions like compliance, tax and
investor servicing into ones that
standardisation, are more technology-enabled,
more customisation scalable and integrated within the
The polarisation of the alternatives overall operating environment.
industry into standardised and To do this, larger firms will build
customised solutions, already in more resource bandwidth with
in evidence in 2015, becomes change agents who will drive
even more marked by 2020. process improvement while core
This shift responds to three key teams continue to drive day-to-
investor demands. The first is the day operations. Firms will also
ongoing demand by the largest seek to better control operational
institutional investors for made- risk, systematically identifying,
to-order products, providing prioritising and managing
greater customisation and strategic operational risks to target areas of
alignment. The second is demand potential vulnerability.
for next-generation commingled
funds that are more focused on The right resources
outcomes. The third is demand in the right places
for liquid alternative funds in
By 2020, the shift to data-informed
standardised formats as some
decision-making will lead to
institutional investors, as well as the
improved organisational designs
mass affluent and newly wealthy,
that can better deliver the right
seek easy access to alternative
resources to the right places. Design
strategies.
elements that will be adopted
by alternative firms include:
From institutional centres of excellence to leverage
quality to industrial expertise; dedicated teams to focus
strength on underserved areas; sourcing
strategies to reduce costs for high-
Owners, investors and regulators
volume, repeatable processes; and
will broaden their expectations from
location strategies to bolster a firm’s
‘institutional quality’ to ‘industrial
presence in a particular jurisdiction
strength’. They will expect
or to reduce cost.
alternative firms to operate in a way
that goes beyond the prerequisite Many alternative firms will also
quality standards to operate even make more effective use of right-
more effectively and offer a broader sourcing strategies. In some cases,
range of capabilities. Having they will shift to using outsource
institutionalised their businesses, providers or utility-like platforms
alternative firms will seek the higher where key skills or geographic
standard of ‘industrial strength’. coverage can be provided more cost-
effectively, externally. In other cases,
Firms will revamp their operations
alternative firms will continue to use
in a cost-effective way that is not
in-house support functions to take
disruptive to their day-to-day
advantage of operating leverage
business. This includes embedding
benefits. Successful right-sourcing
more data-informed decision-
efforts are accompanied by more
making to estimate the impact
systematic and efficient internal
of business mix changes and
oversight to bridge the gap between
process improvement on costs and
external service providers and
revenues. They will then implement
internal resources.
these process improvements,
eliminating operating inefficiencies
by automating and outsourcing
processes. Firms will look to
transform labour-intensive
8 PwC Alternative Asset Management 2020
It’s not only about The result will be a data-centric,
Analytics enable self-service environment in which
the data time is spent on the analysis and
alternative firms
Data and data-centricity are key reporting of data, rather than on the
to better measure business imperatives in 2015. manipulation of data. The resulting
the strength of By 2020, the focus of leading analytics enable alternative firms to
their operational alternative firms will have largely better measure the strength of their
processes and moved on. They will have laid the operational processes and enhance
enhance key necessary ‘plumbing’, and accessing key functional areas such as tax,
functional areas data across their organisations will compliance, reporting and investor
be as natural as turning on a tap. servicing. The model will also help
such as tax,
To do this, they will adopt data plug the current drain on resources
compliance, standard protocols allowing all parts in the manual and non-standardised
reporting and of the organisation to exchange areas of portfolio monitoring,
investor servicing. information, creating a self-service operational due diligence and
model. These protocols will also investor onboarding.
speed information exchange with
key counterparties and service
providers.
the focus of leading alternative firms will
have largely moved on. They will have laid
the necessary ‘plumbing’, and accessing
data across their organisations will be as
natural as turning on a tap.
9 PwC Alternative Asset Management 2020
10 PwC Alternative Asset Management 2020
The alternative
asset management
landscape in 2020
The asset management landscape is undergoing radical
change. This change was set out in a paper PwC published in
early 2014 – Asset Management 2020: A Brave New World.1
The paper captures the global trends impacting the industry
in the coming years and identifies the consequences of these
trends. The key predictions it makes are outlined below and
supplemented with a brief analysis of the potential impact on
the alternative asset management sector:
• A
sset management moves centre-stage. Changing demographics and
markets will thrust asset management to centre-stage. First, regulation
will continue to hinder banks: for alternatives this furthers significant
opportunities such as catalyst hires from banks and the opportunity to
further step into the funding gap. Second, as the world ages, retirement
Public pension fund turns to
and healthcare will become critical issues that asset management can alternatives
solve: capital preservation and alpha generation will be key. Third, By 2020, there will be a fundamental shift
asset managers will dominate the capital raising required to support towards alternatives by many sovereign
and public pension funds. This is the
growing urbanisation and cross-border trade: growing asset classes
continuation of a trend that first gained
in infrastructure and real estate play into alternatives firms’ areas of
traction in the US and then globally. In
expertise. Fourth, asset managers will be at the centre of efforts by April 2015, for instance, the world’s largest
sovereign investors to invest and diversify their huge pools of assets: pension fund, the $1.1tn Government
alternative firms are ideally positioned to partner with them. Pension Investment Fund (GPIF) of Japan
announced a new strategic asset mix in a
•
Huge rise in assets and shift in investor base. Alternative assets are bid to achieve higher returns and address
expected to grow between now and 2020 to reach more than $13.6tn the needs of an ageing population.
in our base-case scenario and $15.3tn in our high-case scenario. Assets Significantly, GPIF’s new mandate allows
under management in the SAAAME (South America, Asia, Africa and for a 5% allocation to alternatives,
the Middle East) economies are set to grow faster than in the developed representing a significant opportunity for
world as these economies mature. This growth will be evidenced by the alternative firms. And it will not end there.
Three smaller funds managing about
projected emergence of 21 new sovereign investors, the vast majority of
$250bn – the Promotion and Mutual Aid
which will originate from SAAAME.
Corporation for Private Schools of Japan,
the Pension Fund Association for Local
•
Growth in assets will be driven principally by three key trends: a
Government Officials, and the Federation
government-incentivised shift to individual retirement plans; the increase of National Public Service Personnel
of high-net-worth-individuals from emerging populations; and the Mutual Aid Associations – plan to adopt a
growth of sovereign investors. This creates the need for more tailored, mix similar to GPIF.
outcome-based alternative products that provide capital preservation, By 2020, it is expected that global pension
but provide upside opportunities. fund assets will have reached $56.6tn,
with alternative assets expected to play
a considerably larger role in their asset
allocation mix.
Source: Adoption of New Policy Mix (GPIF)
October 31, 2014 gpif.go.jpou
1 www.pwc.com/AM202011 PwC Alternative Asset Management 2020
Figure 2: Number of sovereign investors by region alternatives firms, so distribution
alliances will be critical for
160 146 alternatives firms.
North Africa
2
140 125
2
18 Sub-Saharan Africa •
Alternatives become
120 11 16 mainstream. The term
13 Latin America
100 24 ‘alternative’, already strained to
20
80 Europe reflect a mix of different strategies,
25
24 products and firms, becomes
60 Middle East
24 25 further flexed. The growth of
40
North America
20 liquid alternative products, either
31 36
0
Asia-Pacific in the form of mutual funds
2015 2020 or UCITS, continues to create
Source: PwC Market Research Centre analysis based on sovereign investors’ financial information, Sovereign greater integration between
Wealth Center, Prequin IFSWF, The Natural Resource Governace Institute and the Columbia Center on
Sustainable Investment data. alternative and traditional asset
management. By 2020, alternative
asset management will become
Figure 3: Pension fund assets in USD tn synonymous with ‘active asset
management’ and, increasingly,
6.2% ‘multi-asset class solutions’.
60
50 •
New breed of global managers.
4.0%
40
Traditional managers leverage
11.3%
their existing platforms,
30 distribution capabilities and
56.6
20 37.1
brands to develop full-service,
29.4 multi-asset class alternative
10 21.3
businesses. A few of today’s largest
0 diversified alternative firms will
2004 2007 2013 2020
become mega-managers in their
Sources: PwC Market Research Centre = CAGR own right, establishing a presence
analysis based on City UK and Towers Watson
in all the key geographies and
investor segments. The largest
•
Pressures on the asset alternative firms will continue
management industry. their growth trajectory and
Alongside rising assets, there diversification through product,
will continue to be increased asset class and distribution
regulatory requirements, rising expansion, fuelled by build, buy
costs and pressure to reduce fees. and borrow strategies. Specialist
Alternative firms do not escape firms will seek ‘best-of-breed’
this pressure and will seek to status by producing sustained
respond proactively. performance, while certain
emerging firms will fight for shelf
•
Distribution is redrawn – space.
regional and global platforms
dominate. New markets and •
Asset management enters the
untapped investor types will twenty-first century. By 2020,
open up if alternative firms can technology and data-informed
develop the products and access decision-making will become
the distribution channels to tap mission critical to drive investor
them. By the early 2020s, four engagement, data analytics,
distinct regional fund distribution operational and cost efficiency,
blocks will have been formed and regulatory and tax reporting.
allowing products to be sold pan- Data management and investment
regionally. These are: north Asia, in technology have not always
south Asia, Latin America and been a top priority for alternative
Europe. However, these blocks firms – this will change.
benefit traditional firms more than12 PwC Alternative Asset Management 2020 Here’s how So what do these huge future shifts in the industry mean for alternative firms and how they operate in the years to 2020 and beyond? The key business imperatives for alternative firms in 2020 will be: • Choose your channels • Build, buy or borrow • More standardisation, more customisation • From institutional quality to industrial strength • The right resources in the right places • It’s not only about the data The rest of this section looks at each of these key imperatives in turn and examines how managers of alternative strategies can implement and prosper from them.
13 PwC Alternative Asset Management 2020
with global operations, firms already
Choose your accustomed to registered products
channels and firms willing to step up to the
increased requirements.
World-class asset management
organisations may serve many The shift in global economic
different markets, but they have one power from developed regions to
thing in common: they understand developing regions drives continued
the different market segments and focus on sovereign investors,
tailor their products to each market’s fast-growing institutions and the
unique specifications. emerging middle classes in new
markets. These groups of investors
Alternative firms will spend a bigger will increasingly seek branded
portion of their time and resources multi-capability firms. A number
over the coming years figuring out of alternative firms exist in this
how to access the discrete pools category in 2015, while others will
of wealth that will exist by 2020 aspire to join them in the 2020s
and how to tailor their products to through various growth strategies.
each pool’s unique specifications.
While marketing and distribution The sovereign investor
challenges are not unique to the channel
alternatives sector, the solutions
probably are. This is because By 2020, sovereign investor assets
the distribution landscape for are projected to grow by 6.2% to hit
alternatives has been historically $15.3tn.
difficult to navigate. In 2015, few
Geographically and economically
alternative firms possess brands
diverse sovereign investors will
that are well-recognised, well-
require a highly bespoke approach
understood and global. In the lead-
due, in large part, to their different
up to the 2020s, leading alternative
economic objectives. Sovereign
firms will have determined exactly
investors, comprising sovereign
which investor channels they want
wealth funds, public pension reserve
to target and will have developed
funds (PPRF)2 and other large
strategies for each channel.
pension funds, will continue to seek
high levels of transparency. They
Here’s how: will also seek high standards of
By the early 2020s, few alternative governance, reporting and economic
firms will still take a scattergun alignment with alternative firms.
approach to distribution. Many
firms will devote more resources to Sovereign investors will also
deciding which investor channels seek more in-house control and
they want to play in, how profitable transparency over their assets. They
each of those channels are and are transitioning from a model of
how to optimise their chosen hiring external asset managers
channels. These decisions will to talent insourcing, and are
respond to the natural strengths hiring experts across asset classes,
and goals of firms, but also to industries and geographies. Where
their views on the likely future they interact with alternative firms,
behaviour and needs of investors. sovereign investors are consolidating
Decisions will also respond to relationships and seeking innovative
views on regulatory challenges ways to align both parties’ economic
and opportunities that different interests.
channels and markets present.
Regulation brings cost burdens,
but it also offers distribution
2 Source: “Sovereign Wealth and Pension Fund
opportunities, particularly for firms Issues” by Adrian Blundell-Wignall, Yu-Wei
Hu and Juan Yermo,200814 PwC Alternative Asset Management 2020
Here’s how:
Sovereign investors By 2020, there will be more
require a direct sovereign investor participation
and individualistic in alternatives with the largest
approach to earn increases in allocations likely to
their business. be private equity, real estate and
infrastructure. Sovereign investors
pay a great deal of attention to past
performance, regardless of the size
Figure 4: Sovereign investors’ assets in USD tn of the asset management firm, so
distribution to sovereign investors is
not limited to mega-alternative asset
18 6.2% 15.3 firms. If long-term performance is
16 outstanding, firms of any size can
14 9.8% 11.3 secure mandates.
12 6.4
Sovereign investors require a direct
10 and individualistic approach to
8
5.5 4.2 4.3
4.6
earn their business. Alternative
3.5
6 2.8 3.0
3.3 asset firms need to thoroughly
2.7
4 2.2 8.9 understand these non-homogeneous
6.1 6.7
4.1 4.8 5.2 6.3 institutions, their individual needs
2 3.3 4.0 4.4
and objectives, and develop long-
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2020
term relationships with them.
n SWF n PPRF
Source: SWF Institute & PwC Market Research Centre
Alternatives and sovereign investors: a perfect fit?
Sovereign investors usually have one of three economic objectives: capital maximisation, stabilisation and economic
development.
Sovereign investors with capital maximisation objectives
• Search for higher alpha and diversification
• Alternatives to reach 14% of portfolios in 2020
• Private equity allocations by 2020 are expected to increase to 38% of alternative portfolios (36% in 2015)
• Real estate is expected to increase to 41% of alternative portfolios (from 38% in 2015)
• Hedge fund allocations and derivatives are projected to decline respectively to 6% (from 10% in 2015) and 2%
(from 3% in 2015)
• Ageing populations and slower economic growth will encourage PPRFs to seek more yield and more alternatives exposure
• PPRFs will have a more limited risk appetite than sovereign wealth funds due to their explicit pension liabilities
Sovereign investors with economic development objectives
• Naturally favour infrastructure and private equity investments
• Alternatives are expected to account for 29% of sovereign investors’ portfolios in 2020 with 79% of that allocation being in
private equity and infrastructure
Sovereign investors with stabilisation objectives
• Shorter investment time horizons
• Typical asset allocation is highly liquid assets like money market instruments and government bonds
• Risk appetite is low, so less likely to shift to alternatives
Source: PwC SWF2020 and The taxonomy of Sovereign Investment Funds - Richard Boxshall: PwC Market Research Centre analysis based on available recent
financial information15 PwC Alternative Asset Management 2020
Sovereign investors increasingly
Figure 5: Completed co-investments deals by sovereign investors alongside firms
seek to consolidate their manager by year
relationships and seek bespoke
solutions based on their economic 63
70
objectives. Instead of simply 45
42
40 41
allocating large pools of capital to 60
35
many alternative firms to manage
50 29
on a discretionary basis, they 26
increasingly prefer to enter into 21
40
fewer (and broader) strategic
10
relationships. On the one hand, 30
these strategic relationships involve
sovereign investors taking stakes in 20
the alternative firms themselves.
10
On the other hand, alternative
firms have become more adept at
creating innovative co-investment
0
//
2006 2007 2008 2009 2010 2011 2012 2013 2014 2020
and financing arrangements, joint Including all deals across Asia-Pacific
Source: PwC Market Research Centre analysis
ventures, partnerships, advisory based on Sovereign Wealth Center data Europe, Middle East and North Africa, North
America, Oceana and sub-Saharan Africa
relationships and dedicated funds
that allow sovereign investors to
meet their objectives by investing
in less traditional and difficult-to-
manage assets.
As a result, the number of co-
investment deals between sovereign
investors and alternative firms has
risen steadily over the last decade,
from an annual average of 21
co-investment deals between
2006-2009, to an annual average
of 40 deals between 2010 and
2014.3 The co-investment trend will
continue over the coming years,
with co-investments expected to
reach 63 during 2020.
3 Source: Sovereign Wealth Centre16 PwC Alternative Asset Management 2020
Emerging markets channels Here’s how:
Latin American and Asian investors, With private wealth growth in
and particularly institutional and emerging markets outpacing
high-net-worth investors from developed markets, wealth
China, represent a significant, and management becomes an area of
in some cases largely untapped explicit focus and differentiation for
opportunity for alternative some alternative firms. They create
firms. Other Asian markets will bespoke products to match specific
present opportunities, but none customer needs in specific emerging
will continue to dominate the markets. First mover advantage is
focus like China, given its greater critical.
concentration of high-net-worth
The internationalisation of the
individuals (HNWIs).
Asia-Pacific’s share Chinese currency and Beijing’s
In 2012, almost 24% of the high- continuous reduction of investment
of high-net-worth
net-worth assets and 34% of mass barriers will provide opportunities
assets will increase for alternative asset management
affluent assets around the globe
to 29% by 20204 are in Asia-Pacific. It is expected firms by 2020. Among changes
and mass affluent that Asia-Pacific’s share of high-net- likely to have significance for both
assets will increase worth assets will increase to 29% the China and Hong Kong markets
to 43% by 20204 and mass affluent assets by 2020, several are already in
will increase to 43%, much of that evidence:
increase originating from China.
• The launch by a foreign entity
As Latin American (LatAm) of the first Qualified Domestic
countries look for alternative Limited Partnership (QDLP)
investments to domestic bonds, hedge fund.
alternative firms have an
• The establishment of Shanghai-
opportunity to create different
Hong Kong Stock Connect.
products that can attract HNWIs
and sovereign investors. There is • The launch of duty-free zones
an appetite by investors to invest by two Chinese provinces to
in projects in LatAm which will encourage the establishment of
contribute to the development of the financial services firms across the
region and produce above-market respective provinces.
returns.
• The Mainland-Hong Kong Mutual
Recognition of Funds (MRF)
initiative.
The Chinese regulatory authorities
will become more knowledgeable
about different fund structures
leading to a fine-tuning of their
technical expertise. A positive
feedback loop will slowly form,
giving impetus to the alternatives
industry in mainland China.
4 PwC analysis, with past data based on Credit Suisse’s Global
Wealth Report17 PwC Alternative Asset Management 2020
Some international firms on the
Figure 6: High net worth individuals assets in USD tn
other hand will focus on developing
relationships with mainland Chinese = CAGR
90
investment banks, partnering with
76.9
them to gain access to Chinese 80 4.9%
0.9% 0.3
HNWIs. Regardless of which 1.9
70 9.7%
strategy they pursue, international 22.6
asset managers will face competition 60 52.4
50.1
from domestic firms. With their 50 20.9% -0.4% 0.9 6.0%
37.9 12.7
knowledge and access to local 22.5%
9.3
7.7% 9.0% 21.6
40
markets, they will start to compete 7.3
30 8.4% 6.3% 17.0 7.5%
with international firms. Domestic 19.2
Chinese asset managers, like 14.3 10.2% -2.5% 3.4%
20
their international counterparts, 9.4% 1.0% 4.4% 30.6
10 15.8 20.7 21.7
will also focus on creating global
0
brands and on selling their funds
2004 2007 2012 2020
to international investors in Europe
n North America n Europe n Asia-Pacific n Latin America n Africa
and the US.
Source: PwC Market Research Centre analysis based on Credit Suisse data
In LatAm, distribution channels are
concentrated among a few firms
and are likely to be controlled by Figure 7: Mass affluent assets in USD tn
the biggest banks well beyond = CAGR
2020. In Brazil, for example, the 120
asset management industry is 100.4
6.8%
concentrated among a few big firms 100 1.3%
9.9% 4.5 0.9
with the top ten asset managers
responsible for 88% of assets under 80
management in the country.5 20.9% -0.4% 10.1%
59.5 43.3
To enhance the distribution of 60 55.8
22.5% 7.7% 2.1 10.1%
alternative products within the 1.4
42.1
region, alternative firms will 40 0.8 8.4% 15.1 6.3% 20.5 9.8%
consider alliances with local asset 11.9 31.6
10.2% -2.5% 4.2%
managers and distributors. 20 9.4%
25.8
1.0%
22.8
4.9%
19.3
13.7 20.1
By 2020, firms that have successfully 0
10.0 13.0
integrated emerging market 2004 2007 2012 2020
regulatory requirements into a n North America n Europe n Asia-Pacific n Latin America n Africa
global compliance framework will Source: PwC Market Research Centre analysis based on Credit Suisse data.
have a competitive advantage.
These firms will have achieved
more consistent, efficient global
compliance controls, resulting in
cost savings and reduced regulatory
risk exposure.
5 Source: Associação Brasileira das Entidades dos Mercados
Financeiro e de Capitais (ANBIMA)18 PwC Alternative Asset Management 2020
The retail channel cases, traditional firms will build
or buy turnkey platforms to attract
For some alternative firms, the alternative portfolio management
emergence of liquid alternatives talent. In other cases, they will
is an enabler, while for others it leverage their established brands
is a disrupter. Broadly speaking, and distribution capabilities
traditional fund managers will to effectively borrow portfolio
dominate retail alternatives in the management talent from alternative
2020s, as this group understands firms through sub-advisory and
registered products and controls other relationships.
retail-focused platforms.
Liquid alternatives pose a number
The first wave of liquid alternatives of risks, as well as opportunities.
(1.0) has been largely targeted at Both alternative and traditional
the institutional space. The second firms will carefully weigh whether
wave (2.0) will increasingly focus they are really committed to
on the retail space, including the marketing alternative products
fast-growing defined contribution to retail investors. In particular,
pensions fund market. Traditional they consider whether the core
asset managers with their alternative strategy can be adapted
established distribution capabilities to a registered product and whether
For some
and trusted brands will dominate the firm has the necessary portfolio
alternative firms, 2.0, although a number of management, operational and
the emergence of predominantly alternative firms marketing skills to offer a profitable
liquid alternatives will also develop retail capabilities. and compliant liquid alternatives
is an enabler, while fund.
for others it is a Here’s how:
Traditional and alternative firms
disrupter. Given the nature of the liquid
that decide to follow the retail route
alternatives market and growth
may have to devise a business plan
potential, the question for many
that is starkly different to their
Given the unique traditional managers is how to enter
usual modus operandi. In the light
portfolio liquidity the market. On the other hand,
of the attention from regulators,
given the unique portfolio liquidity
needs and different asset management firms should
needs and different (lower) fees, the
(lower) fees, questions for alternative firms are if
enter this new line of business
the questions well-prepared from a compliance
and how to participate.
for alternative and organisational standpoint. This
Liquid alternatives is the epitome includes:
managers are
of convergence between retail
if and how to • training
products, which are dominated by
participate. traditional firms, and alternative • assessing customer suitability
products, which are dominated
by alternative firms. It therefore • marketing and education
represents the potential for a
• building out compliance and
classic alliance of distributor and
surveillance, and
manufacturer. In a fragmented
market where traditional firms • robust liquidity risk management.
and alternative firms do not yet
see each other as peers, they will
need to figure out how to coexist
and even work together. In some19 PwC Alternative Asset Management 2020 Liquid alternatives: from trickle to torrent According to Morningstar, liquid alternatives assets have recorded a CAGR of 50% between 2008 to 2014, from USD 27 billion in 2008 to USD 304 billion in 2014. The number of funds grew by 226% during the same period from 482 to 1,569 funds. PwC estimates the demand for liquid alternative mutual funds to surge from $260bn at the end of 2013 to around $664bn by 2020. In addition, while assets in European hedge funds have grown by 13% a year since 2008, alternative UCITS – the European equivalent of US alternative mutual funds – have grown by more than 30% a year over the same period. Source: Morningstar Alternative Investments Observer 2009/2015
20 PwC Alternative Asset Management 2020
selected and differentiated strategies.
Build, buy or borrow Their rationale is that focusing on
a set of core competencies provides
Differentiation, relationships and the best basis for outperformance,
branding will become major planks of and that investors are willing to pay
business strategy in the alternatives for superior investment capabilities
sector. Over the next few years, firms in selected areas. They will primarily
will make major decisions about their target the largest institutional
business models, explicitly choosing allocators globally, offering bespoke
the kind of business they seek to and heavily customised solutions.
be and developing their business
by building, buying or borrowing Multi-strategy firms. In the
capabilities. middle of these two extremes are
a large number of multi-strategy
Structurally, the alternatives market firms. These firms concentrate on
in 2020 will be more clearly focused generating strong returns and low
on three key business models: volatility through strong investment
Diversified alternative firms. teams and dynamic asset allocation.
These large firms play across They invest in leveraging the multi-
multiple alternative asset classes and strategy structure to expand into
products, including hedge funds, new, often tangential, investment
private equity, credit, real estate, strategies, creating a repeatable
mezzanine and infrastructure. They model (e.g. a credit manager moving
target predominantly institutional into direct lending). They believe
investors looking for an investment that growing AUM significantly will
partner with a diversified offering require offering different strategies
and experience across asset classes. within the same asset class. They
These diversified firms leverage have the resources, capabilities and
synergies across the group by cross- credibility to deliver competitive
selling to clients and sharing ideas, performance in other styles. Their
insights and capabilities. They stretch current operating platform is flexible
their brand and capabilities across enough to accommodate such a
alternative asset classes, seeking strategy.
to add value through a portfolio
approach that materially exceeds the Here’s how:
sum of its parts. Alternative firms have often
functioned as manufacturers,
Becoming a diversified alternative
sponsors and/or distributors of
firm may be an obvious choice for
their own products, and some will
many large traditional asset managers
stay that way. But in the lead up
as they continue to push aggressively
to 2020 and beyond, these roles
into the alternative space, assembling
evolve. Alternative firms looking
multi-asset class businesses from
to access key investor channels
within their ranks and filling gaps
will increasingly sell their products
where needed. It is also a strategy
through distributors or other
that the largest alternative firms
intermediaries. Multi-strategy and
will continue to pursue in search of
diversified alternatives firms will
growth.
access specialised alternative asset
Specialty firms. There will still be management capabilities in order
strong competition among specialist to broaden their asset class, strategy
firms, which will devote their and/or products offerings.
resources to becoming best-in-class
Regardless of which business model
(e.g. a dedicated hedge fund, private
each firm adopts, they will pursue
equity or real estate firm keeping to
one or more of three possible growth
their core competency). These firms
strategies: building, buying or
create very strong core competencies
borrowing.
to become the leading player in21 PwC Alternative Asset Management 2020
The builders will look inwardly for Figure 8: US alternative asset management deal volume by subsector
growth, leveraging their existing
capabilities and investment talent to
45
create repeatable models, in the belief
40
that their current platform is flexible 8
35 13
enough to accommodate change 6
and growth. They become adept at 30
14
identifying, recruiting and developing 25 14
talent and make doing so a strategic 20 10 11
8 12
focus and competency. They also 34
15 30 30
create talent mobility programmes,
10 21
as practised by many successful 17
19 18 16
15
traditional investment firms. 5
0
The buyers will primarily comprise 2006 2007 2008 2009 2010 2011 2012 2013 2014
managers who are looking to n Hedge fund and CLOs n Private equity and venture capital
expand their alternative capabilities Source: Thomson Reuters, SNL and PwC analysis
across asset classes and strategies
by acquiring talent, track record
and scale overnight. As discussed Figure 9: Acquisitions of US alternative asset managers by foreign buyers
in PwC’s Asset Management M&A
17
trends paper,6 alternative asset
management deals will dominate the 10
M&A market. And this deal flow will 2
not be solely US domestic activity, as 8
Number of deals
10 of the 35 deals in 2014 involved 2
6
non-US buyers looking outside
2
their home territories for attractive 4 3
1
2 8
acquisition targets. 5
2 6
3
2 4 6
Large traditional firms will build out 3
2 4
1 1
their alternative platforms, while -
large alternative firms will buy to fill 2006 2007 2008 2009 2010 2011 2012 2013 2014
capability gaps. Some will opt for a
decentralised network of dispersed n Foreign buyers’ deals (Volume undisclosed) n Foreign buyers’ deals (Volume disclosed)
alternative asset management Source: Thomson Reuters, SNL and PwC analysis
capabilities such as the multi-
boutique model. Others will seek an
For them, teaming up with a larger
integrated model. Still others will
manager or a distributor can help Regardless of
follow a mixed model.
them access the necessary resources, which business
The borrowers believe that they scale and experience to reach new
investor channels. Traditional
model each firm
can best achieve their growth
firms will continue to manufacture adopts, they will
strategy by ‘partnering’ with other
institutions including other asset and distribute their own products, pursue one or more
managers, wealth managers, but they will increasingly decide of three possible
private banks and fund-of-funds, to buy or borrow the capabilities growth strategies:
of dedicated alternatives firms.
to expand their capabilities and building, buying or
distribution channels. These Diversified alternative firms and
multi-strategy firms will also decide
borrowing.
relationships will take many forms
including distribution arrangements, on a combination of build, buy and
joint ventures and sub-advisory borrow strategies to expand their
relationships. capabilities.
Specialty firms need to consider
whether to allow their differentiated
capabilities to be bought or borrowed
by larger firms looking to supplement 6 Asset Management M&A Insights: In pursuit of growth –
their asset class or strategy offerings. PwC April 201522 PwC Alternative Asset Management 2020
By 2020, alternative firms will
More effectively decide which approach,
standardisation, or approaches, to take and then
focus their resources into developing
more customisation the appropriate strategies, products
Firms will increasingly evaluate and operations.
their product development
strategies in the years leading up Here’s how:
to 2020 in accordance with their
Customised solutions are
overall business objectives. New
By 2020, standard
products will only be launched
alternative asset after an established product The most sophisticated institutional
management firms development process that considers investors in 2020 will have more
will effectively strategic fit, the marginal costs and complex structures and objectives
decide which ongoing legal, tax, operational and and demand highly customised
approach, or compliance issues. alternative solutions.
approaches, to Alternative asset management firms In a 2014 report,7 more than half
take and then focus by 2020 will respond to three key of the 220 hedge fund investors
their resources investor demands for products: surveyed said they planned to grow
into developing allocations via customised mandates,
• The ongoing demand by the compared to only 6% who made the
the appropriate largest institutional investors same assertion in 2013.
strategies, products (e.g. sovereign investors) for
and operations. made-to-order products with Rather than merely gaining
greater customisation. exposure to specific asset classes,
institutional investors will
• Next-generation commingled increasingly seek outcome-based
funds that are focused on investment solutions that seek to
outcomes. deliver target returns or predefined
cash flows over various durations.
• Demand for the creation and
servicing of liquid alternative Investors’ decisions will also be
funds for institutional investors driven by environmental and social
and retail investors including considerations. For example, in
investors in developed markets a recent survey, 71% of limited
and the newly wealthy in partners interviewed said they
emerging markets seeking would decline to participate in a
alternative strategies. fundraising, or would turn down
a co-investment opportunity
As a result of these demands, where environmental, social and
alternative firms will be pulled governance (ESG) risk issues were
in different directions. On the present. In addition, 18% of those
one hand, they must show their interviewed also noted that they had
commitment to finding bespoke withdrawn from an investment or
solutions for their largest, most withheld capital on ESG grounds.
strategic institutional investors. As noted in the survey, 97% of
On the other hand, they must limited partners interviewed
adapt commingled funds to serve believed that responsible investment
the changing demands of both will increase in importance over
institutional and private wealth the next few years. It is expected
investors. At the same time, they that the amount of investors who
must position themselves to attract will continue to require socially
the potentially huge (and stable) responsible investing as part of side
asset flows from permanent capital letter arrangements will increase
vehicles and the world’s mass and, in response, managers will have
7 Waiting to Exhale – Barclays Strategic Consulting, 2014
affluent. to adopt policies and practices to
8 PwC Bridging the Gap: Aligning the Responsible Investment
interests of Limited Partners and General Partners, May 2015 accommodate these requirements.823 PwC Alternative Asset Management 2020
Partnership models evolve Figure 10: As per the Financial Stability Board (FSB), shadow banking assets
accounted for 25% of the global financial assets in 2013*. By 2020 do you think
The shift from standardised that shadow banking assets will be:
products to customised solutions
drives more interaction between
asset managers and their clients. 0% 0% 16% 66% 18%
Asset managers effectively partner
with institutional investors to
address bespoke needs. These new
relationships will bring with them
even greater alignment of interest in
terms of economics, transparency,
service and risk management.
55% or more of 45% to less than 35% to less than 25% to less than less than 25% of
In the case of the largest and most global financial 55% of global 45% of global 35% of global global financial
sophisticated institutional investors, assets financial assets financial assets financial assets assets
the discussion of co-investing and
fees will by 2020 have evolved into Source: PwC Capital Markets 2020. Base: 261 Capital Markets Surveyed firms
a discussion of economic sharing to *At approximately USD 70 trillion up from USD 26 trillion a decade earlier.
align interests. This takes the form
of vertically integrated structural
Filling the funding gap
and economic relationships to
facilitate economic and risk-sharing In 2020 and beyond, alternative
rather than the contractual fee for firms continue to move into areas
services model. Additionally, hedge traditionally dominated by banks,
funds seek greater alignment of such as lending, securitisation
interests by trading fee levels against and financing. This provides
AUM and liquidity. Alternative opportunities for next-generation
In the case of the
firms launch more permanent commingled funds that focus more largest and most
capital vehicles, such as business closely on outcomes. The greater sophisticated
development companies (BDCs), range of assets and the more diverse institutional
Real Estate Investment Trusts income streams allow the creation of investors, the
(REITs) and public vehicles, to a number of outcome ‘buckets’ that discussion of
assure a more stable capital base. each meet the needs of a different
co-investing and
investor type.
Regulation and tax fees has by 2020
The funding gap will present evolved into a
Regulation and tax are also part of considerable new opportunities. discussion of
customised alternative solutions. For In its 2014 Global Banking
example, as a consequence of asset economic sharing
Monitoring report, the Financial
management inhabiting the space Stability Board (FSB) noted that
to align interests.
once occupied by banks, regulators shadow banking assets accounted
and tax authorities are being forced for 25% of total global financial
to address certain new investment assets. The FSB also pointed out
activities (e.g. direct lending) which that some of the most rapid growth
traditionally had been conducted (18%) among non-bank financial
by non-investment entities such intermediaries engaged in shadow
as banks. In these jurisdictions, banking activities was from
appropriate tax structures, risk investment funds. In addition, a
appetites and reporting must be report9 showed that a large majority
considered. (82%) of capital markets industry
executives expect shadow banking
For all investor types, alignment
assets to grow by 2020, with some
with global tax rules will be a major
of that growth coming from hedge
consideration, given the increasing
and private equity funds. In China,
cross-border nature of investors and
where shadow banking – also
investments.
known as the ‘private trust’ sector
9 Capital Markets 2020 – PwC 201524 PwC Alternative Asset Management 2020
– has grown to represent 20% of Both alternative and traditional
all banking transactions by 2014, firms must carefully prepare before
shadow banking is also likely to launching liquid alternative funds
grow rapidly by 2020, despite new aimed at retail investors, in order
regulatory measures. to capitalise on opportunities while
minimising reputational risk. To
The shift by asset management this end, they typically conduct a
firms to fill the funding gap will be number of pre-launch assessments:
encouraged by some governments
and also by sophisticated • P
reliminary vetting: The types
Some alternative institutional investors who seek of alternative products that are
firms create access to strategies and the in demand and the investor
illiquidity risk premium, which channels to target.
partnerships
are not always available to other
with banks Regulatory ‘buy-in’: Firms discuss
•
investors. new products with regulators in
and the largest
advance.
institutional Ongoing government deficits
investors, provide opportunities to invest in •
New product approval: Includes
providing infrastructure and other projects approval from key stakeholders
traditionally done through public such as operations, risk
integrated
programmes. As well as creating management and compliance,
expertise in commingled funds, some alternative senior management and the
managing new firms create partnerships with board of directors. Regulators
asset classes and banks and the largest institutional expect to see evidence of this
building products investors, providing integrated process. As alternative products
that often have expertise in managing new asset are new for the retail segment,
classes and building products which they require greater due
limited liquidity
often have limited liquidity but offer diligence by the new products’
but offer steady steady income flows. This kind of committee, which should focus
income flows. partnership alleviates the pressure on reputational, regulatory and
on banks’ balance sheets, while legal risks including valuation
harnessing their expertise. practices and reporting
capabilities.
Creation and servicing of
•
Technology and operations:
retail funds
Operations are agile and
By 2020, the asset management adaptable to accept new
industry will have invested heavily products and assess new service
in the development of retail- requirements.
oriented products and business
models to support the demand
for liquid alternatives, meaning
the number of sponsors of these
products will expand considerably
from 2015 levels. Traditional asset
management firms, who have
already begun to expand their
alternatives product sets in 2015,
will be in a race with alternative
firms to provide multi-asset
solutions that include alternative
strategies.25 PwC Alternative Asset Management 2020
Figure 11: Attributes of institutional quality and industrial strength
Reporting Agility
Operational
due
Scale
diligence
Risk Security
Institutional Industrial
Quality strength
Talent Efficiency
Regulation Automation
Measurement
Operations
Source: PwC
Owners, investors and regulators
From institutional will raise their expectations beyond Asking the tough questions
quality to industrial the standard of ‘institutional
The key question many managers will
quality’. Having institutionalised
strength their businesses, alternative firms
ask themselves is: Can I be a top-quartile
investment performer and a top-quartile
Successful companies in the will seek the higher standard of profit performer too? In other words, the
‘industrial strength’. strategy must be a strong performer but, in
manufacturing sector can readily
the final analysis, profit and compensation
adapt to product changes and the depend on collecting fees and managing
Global regulators too will require
level of production. In a rapidly costs. This, in turn, will largely depend on the
varying and ever-increasing degrees
evolving environment, they are effectiveness of the manager’s infrastructure
of risk management, stress-testing
able to regularly overhaul their and operations.
and transition planning. Oversight
operations and retool their factories.
of the firm’s risk management
They do this cost-efficiently and
function will remain particularly
without disruption to operations.
acute, with an emphasis on Owners, investors Alternative firms
independence from portfolio
Likewise, alternative asset and regulators increasingly
management firms need to be management.
will raise their recognise that
adaptable to changes in their
To match these expectations and expectations incremental change
product mix and the demands
get to the next level – whether beyond the won’t necessarily
on their operations. From now
in terms of profitability, growth standard of move the needle.
until 2020 and beyond, they will
or diversification – alternative
consider how they can revamp their ‘institutional In some cases,
firms increasingly recognise
operations to provide customised
that incremental change won’t quality’. Having transformational
solutions to institutional clients, institutionalised change is required.
necessarily move the needle. In
support new asset classes, products their businesses,
some cases, transformational
and investors, and keep pace with
change is required. alternative firms
regulatory and tax requirements.
They will seek to do all this in a cost- will seek the
effective way that is not disruptive higher standard
to their day-to-day business and of ‘industrial
in a way that focuses resolutely on strength’.
profitability.26 PwC Alternative Asset Management 2020
Fees will continue to come under comprised of available operational
Managing pressure as firms enter different capabilities, such as the operating
operational markets and offer different – and, model, in-house competencies, the
sometimes, lower fee or lower degree of automation and service
capabilities will margin – products. So an increase providers. By overlaying the capability
require equal parts in AUM will likely not result profile on the complexity profile,
art and science. in a corresponding increase in it will be possible to see if and how
profitability. Pressure on margins changes to the complexity profile can
reinforces the need for firms to build be proactively managed. The overlap
agile, scalable and economically of the two profiles determines the
viable infrastructure. agility of the alternative firm.
An agile operating model Firms will utilise more data-driven
decision-making tools, including
Management company executives modelling of headcount, variable costs
will expect their support functions and margins, to create these profiles.
to be agile and scalable with a high They will combine the measurable,
The search for agility
degree of efficiency and operating objective data these tools provide with
Viraj Patel, the head of operations for ALT
leverage. their own experience and judgement
Asset Management LLC, an alternative firm
to make more strategic decisions
has a problem. 40 Act LLC, a large traditional
about the operational direction of
firm has taken a significant stake in ALT Asset Here’s how:
Management LLC with the goal of launching their business.
Many alternative firms in 2020
a liquid alternative strategy which is in huge
will have moved beyond a reactive
demand by 40 Act LLC investors. Process improvement
approach to a more proactive and
Viraj tells his CEO Barbara Wassner: “I don’t
data-informed operational strategy. An agile operating model requires
know if we can handle all that growth right
now.” After 2009, Viraj had overseen a 10% Managing operational capabilities firms to streamline operations more
reduction in staff numbers and his operations will require equal parts art and aggressively, automate processes
team is still stretched years later. science. Decisions that have been and delete inefficiencies.
“Well Viraj, it sounds like we need to hire some made primarily based on experience
new people,” said Barbara. “Let me know and gut will be informed by specific,
Here’s how:
what you need. But bear in mind we have to objective data. In PwC’s Global
be efficient – we are only getting 100bps on Data & Analytics Survey 2014: Big To do this, firms build in more
these funds.” Decisions, 94% of respondents resource bandwidth with change
Viraj didn’t simply want to hire a bunch of new representing companies across a agents who can drive process
people, he wanted to create a strategy that number of industries, said that improvement while others continue
could dynamically react to changing needs. senior management believe they to drive the day-to-day operations.
He wants to make operations more agile and are prepared to make their next big
scalable. But how to do it? He didn’t have a Value-enhancing opportunities will
decision but just 38% relied on data include:
sense of ALT’s unique ‘complexity profile’ and
how that would change with its growth over
and analytics to do so.
• I mproving the ability to identify
the coming years. Equally, he was not entirely and measure cost reduction
An agile operating model places a
sure how much more he could get out of his
greater emphasis on an objective opportunities.
in-house resources and how to best access
external expertise, because ALT had never understanding of an alternative •
Creating greater automated
thought about its unique ‘capability profile’. manager’s unique operational cross-functional workflow, both
“Enough is enough,” Viraj said to himself. “No demands and aligning it with their internally and with key service
more ad hoc decisions, we’re going to get specific operational capabilities. More providers.
more scientific.” He immediately started to specifically, firms will increasingly
write a memo to Barbara, on the necessity of
•
Instituting straight-through-
define their own ‘complexity profile’, processing related to the extraction
building more agility into ALT’s operations. which is shaped by the external and and transformation of data.
internal inputs that drive complexity
in their businesses. These inputs •
Designing automated
include operational demand drivers environments for routine and
such as the mix of asset classes, fund repeatable processes.
and fee structures, transactional •
Identifying and segregating
volume, regulatory requirements, high-volume, low-risk processes,
investor demands, reporting and in order to outsource or move to
so on. They will then overlay the lower cost locations.
complexity profile with a ‘capability
profile’. The capability profile isYou can also read
