Alternative Investments: Asset Managers Need To Up Their Game (BCG Report)
COVID-19 has taken the sheen off the strong inflows into alternative assets seen in 2019.
According to a new report from Boston Consulting Group, there is likely to be fierce competition for limited capital in 2020 after the coronavirus crisis. Asset managers will have to deal with these new market realities by taking recourse to technology and gaining an edge through expertise and scale.
2019 – a banner year
BCG observes that alternatives constitute nearly half of all global asset revenues though it has only a 16% share of AuM.
Alternatives were among the strongest asset classes in 2019.
Within alternatives, private markets—including private equity, real estate, infrastructure, and private debt represent 60% of revenues in alternatives. Further, these assets have grown at a CAGR of 9% since 2008.
However, hedge funds have suffered from comparison with the S&P500, and as a result, asset growth is declining, tapering to 3% CAGR over the past five years.
However, BCG expects alternatives to grow at a CAGR of 4% through 2024 when they will comprise 17% of global AUM and account for 49% of global revenues.
Challenges ahead
2020 will see several challenges, particularly from limited asset flows due to recessionary fears and the preference for risk-free safe havens.
Another challenge will arise from larger institutions choosing to insource their investments in alternatives to save on fees payable to external managers.
Investors will, therefore, be very choosy and put investments through the rigors of deep scrutiny. Investors unable to go through this process will trust their investments to the top-flight managers.
“Leading asset managers will continue to amass scale, add breadth and depth to their investment expertise, and reinvent their business and operating models— not only to survive but also to strengthen their competitive edge,” says the BCG report.
“Economics [will] disproportionately accrue to firms that have a clear value proposition, expertise, brand recognition, distribution capabilities, and scale.”
However, hedge funds will find themselves in a hard place. According to BCG, hedge funds AuM will only grow at 1% CAGR through 2024. Worse, revenue growth will shrink by 1% annually.
Growth strategies for the future
Asset managers will need to assure growth in the new normal by adopting one or more of the following strategies:
- Inorganic growth through M&As and partnerships to quickly gain scale
- Ensure their operating model is attuned to their growth aspirations
- Invest in data and analytics
- Build a low-cost but at-scale alternatives business
- Expand into other investment vehicles (e.g. defined contribution retirement plans)
“In the next big wave of competition, successful industry players will need to create world-class client experiences that extend beyond performance at a given cost and into a more all-encompassing value proposition for the client,” said BCG.
Related Story: A Conversation with Meb Faber of Cambria Investments
COVID-19 has taken the sheen off the strong inflows into alternative assets seen in 2019.
According to a new report from Boston Consulting Group, there is likely to be fierce competition for limited capital in 2020 after the coronavirus crisis. Asset managers will have to deal with these new market realities by taking recourse to technology and gaining an edge through expertise and scale.
2019 – a banner year
BCG observes that alternatives constitute nearly half of all global asset revenues though it has only a 16% share of AuM.
Alternatives were among the strongest asset classes in 2019.
Within alternatives, private markets—including private equity, real estate, infrastructure, and private debt represent 60% of revenues in alternatives. Further, these assets have grown at a CAGR of 9% since 2008.
However, hedge funds have suffered from comparison with the S&P500, and as a result, asset growth is declining, tapering to 3% CAGR over the past five years.
However, BCG expects alternatives to grow at a CAGR of 4% through 2024 when they will comprise 17% of global AUM and account for 49% of global revenues.
Challenges ahead
2020 will see several challenges, particularly from limited asset flows due to recessionary fears and the preference for risk-free safe havens.
Another challenge will arise from larger institutions choosing to insource their investments in alternatives to save on fees payable to external managers.
Investors will, therefore, be very choosy and put investments through the rigors of deep scrutiny. Investors unable to go through this process will trust their investments to the top-flight managers.
“Leading asset managers will continue to amass scale, add breadth and depth to their investment expertise, and reinvent their business and operating models— not only to survive but also to strengthen their competitive edge,” says the BCG report.
“Economics [will] disproportionately accrue to firms that have a clear value proposition, expertise, brand recognition, distribution capabilities, and scale.”
However, hedge funds will find themselves in a hard place. According to BCG, hedge funds AuM will only grow at 1% CAGR through 2024. Worse, revenue growth will shrink by 1% annually.
Growth strategies for the future
Asset managers will need to assure growth in the new normal by adopting one or more of the following strategies:
- Inorganic growth through M&As and partnerships to quickly gain scale
- Ensure their operating model is attuned to their growth aspirations
- Invest in data and analytics
- Build a low-cost but at-scale alternatives business
- Expand into other investment vehicles (e.g. defined contribution retirement plans)
“In the next big wave of competition, successful industry players will need to create world-class client experiences that extend beyond performance at a given cost and into a more all-encompassing value proposition for the client,” said BCG.
Related Story: A Conversation with Meb Faber of Cambria Investments
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