Thursday, 30 March 2017
Last updated 4 hours ago
Jun 30 2015 | 8:15am ET
Global consultancy PwC has released a new report on the alternative investment industry predicting assets to reach $15.3 trillion by 2020 if monetary policy continues to be accommodative and GDP growth stable, or $13.6 trillion if interest rates in Europe and the U.S. rise and capital markets undergo corrections.
The new report, entitled Alternative Asset Management in 2020: Fast Forward to Centre Stage, is the latest in a series of studies on the alternative asset industry by PwC.
It predicts the next five years will be a period of transformation for the alternative investment industry as the need for sustainable long-term returns through a period of very low interest rates has propelled alternative investment solutions to center stage around the world.
Accordingly, PwC notes, the principal focus for many firms will shift to accessing new distribution channels and creating a broader asset class and product mix. Technology will become an even greater differentiator, with leading players working to build industrial-strength operational platforms, revamping their business and infrastructure to be more agile, durable and scalable, with greater efficiency and operating leverage.
Asset growth will be higher in South America, Asia, Africa and the Middle East, predicts PwC, reflecting the growth in sovereign wealth and high-net-worth investors in these regions. Private equity, real estate and infrastructure will likely lead in terms of allocations.
“The shift in global economic power from developed to developing regions will drive continued focus on sovereign investors, fast-growing institutions and the emerging middle classes in new markets,” noted Mike Greenstein, global alternative asset management leader at PwC. “These groups of investors will increasingly seek branded multi-capability firms. Currently, a number of alternative firms exist in this category. Others will aspire to join them.”
PwC predicts growth in alternative assets will also be driven by government-incentivized shifts to individual retirement plans. Aging populations around the world suggest a fundamental shift towards alternative investments underway by many Sovereign and public pension funds. With global pension fund assets expected to reached $56.6 trillion by 2020, alternative assets are expected to play a considerably larger role in allocations.
PwC expects alternative asset managers to continue moving into areas traditionally dominated by banks, such as lending, securitization and financing, as the funding gap in the world’s economies continues to present considerable new opportunities. However, traditional institutions are unlikely to cede these segments entirely to alternative managers, leading to partnerships with banks and the largest institutional investors.
Alternative managers will develop more sophisticated market strategies, more focused distribution channels, and better recognized brands. Many alternative investment firms will devote more resources to deciding in which investor channels they want to play, how profitable each of those channels are, and how to optimize them.
Additionally, PwC expects the industry to continue developing standardized products, in the form of liquid alternatives and other permanent capital vehicles, in response to growing investor demand for products that mimic hedge fund strategies but are available to a wider swath of investors and for very little relative cost.
PwC’s report also highlights the role of technology in the alternative asset industry, noted that while investment in tech has not been a top priority for many alternative firms, the next five years will see technology become mission critical in driving investor engagement, data-informed decision making, and efficiencies in operations, compliance and administration. The report suggests solid growth ahead for third-party administrators, business process outsourcing firms, and other industry vendors.
Ongoing challenges for industry will remain rising assets, increased regulatory requirements and pressure to reduce fees, PwC noted.
“Most firms will recognize that success in generating alpha – measuring performance on a risk-adjusted basis - does not on its own guarantee success as an organization,” continued Greenstein. “Those managers who are looking not just for growth…will develop their infrastructure, have a clear strategy and create robust organizational structures to exploit the opportunities that will emerge in the coming years.
“While they will still manage highly disparate strategies that leverage unique skillsets, operationally they will start to look more homogenous as a group as they seek to create ‘industrial strength’ in their operations and processes,” he said.
“Durability and profitability will be essential credentials for any alternative firm which has ambitions to follow – or lead - the industry to the center stage of the investment landscape.”
PwC’s report is available for free here.