Alternative asset management 2020 Fast forward to centre stage - Fast forward to centre ...

 
Alternative asset management 2020 Fast forward to centre stage - Fast forward to centre ...
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
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                                          Contents

                                          Introduction                        4

                                          Executive summary                   6

                                          The alternative asset management   10
                                          landscape in 2020

                                          Here’s how                         12

                                          Conclusion                         34

                                          Contacts                           35
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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.
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                                          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.
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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.
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                                          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
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                                                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.
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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/AM2020
11 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 than
12 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,2008
14 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 information
15 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 Centre
16 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 Report
17 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 some
19 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 in
21 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 2015
22 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.8
23 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 2015
24 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 is
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