This article was first published on December 17, 2021.
We were hoping for a more “normal” 2021, but in practice it has looked more like a form of “equilibrium.” That said, the asset management industry has been relatively lucky — with some adjustments (and notably less travel) we have carried on our business pretty effectively. Climate, and ESG more broadly, remain top of everyone’s agenda, but under the bonnet the pace of change is massive, with major advances in data, investment process integration and climate analytics. However, the big “known unknown” is what happens to the macro backdrop (and when) and the consequences for markets…We offer some thoughts on this below, together with our other predictions for 2022.
10 Ideas in Asset Management for 2022
1. Macro tailwinds fade, taking the air out of managers’ sails.
Conditions that have driven markets to hit record highs are poised to revert as rates march higher, targeted fiscal stimulus is retracted, and central banks rein in asset purchases. This will create a reckoning for asset managers who have developed bloat in their businesses, become overly reliant on embedded beta driving inflows despite mediocre alpha, or who have been highly dependent on cheap leverage to prop up deal-making volumes and fund returns. It will also reshape product demand patterns benefitting strategies, asset classes and geographies (e.g., value, inflation-resilient real assets, inflation-sensitive securities and commodity baskets, select emerging market countries) that haven’t attracted as much attention or have been relatively out of favor during the buoyant market conditions.
2. Traditional managers find some way…any way into alts and private markets.
Traditional players who want to expand into alternatives and private markets but find the valuations of potential acquisitions too high or are concerned about integration risks, will expand organically into the semi-liquid space of traditional asset classes (e.g., pre-IPO space in equities, or CLO/syndicated loans in fixed income). Others will bite the bullet and pay whatever it takes to secure alts and private market capabilities, be that a whole firm or high-priced individuals with the right experience, track record and connections. The pressure to find profitable growth opportunities has built up to the point where the risk of not having these capabilities will become greater than the risk of overpaying or messy integrations.
3. Hitting the “gas”— tokenization drives the next phase of private market democratization.
The democratization of private assets has gathered pace in recent years as managers target a new class of investors with retail-friendly structures and as technology platforms reduce the administrative burden of distributing and investing in private market products. As the back-end infrastructure is built to support tokenization of private market assets, it will usher in the next wave of investor access through reducing costs, enhancing secondary market liquidity, and enabling fractional access. This will open new opportunities in private markets for asset managers that can build compelling products, and the supporting systems, processes and controls that are required to take advantage of distributed ledger technology.
4. The race to secure long-term capital will intensify.
Driven by the industry’s desire for more stable sources of capital and buoyed by investors’ willingness to sacrifice liquidity for access to top-tier alternative managers, there will be a wave of new long-term or permanent capital funds that facilitate investment in illiquid assets. Consistent with this trend, asset managers — including the usual suspects (private equity/private debt firms), as well as banks with alternative investment arms and even traditional managers, especially those with a fixed income focus or insurance investment heritage — will compete for insurance business as part of a strategy to lock in long-term funding sources. This will further accelerate the prominent role that asset managers are playing in transforming the insurance sector into a conduit for funneling capital into high yield/return strategies.
5. Regulatory environment “hotting up,” particularly around greenwashing.
Regulators are increasingly holding managers to account across many areas, but most noticeably around greenwashing where it’s gaining momentum across both sides of the Atlantic. Regulation will be become more prescriptive, going as far as introducing a “nutrition label” for ESG products, holding asset managers accountable for delivering their ESG investment promise and value for money.
6. From ESG products to ESG experiences.
To date, most focus has been on developing and launching ESG products to satisfy the burgeoning demand for all things labeled ESG. This is going to change as clients recognize that their needs are not being fully met through simply buying undifferentiated products. While all products will need to satisfy basic financial needs, leading asset managers will take a “customer first” approach and design holistic experiences — where the product design is just one aspect — to satisfy higher order needs like fulfilling purpose, creating impact, building trust and sense of community, and even triggering joy.
7. Virtual becomes reality.
Based on previous research prior to the pandemic, we estimated that a fully virtual asset manager could operate with a ~40% lower cost base. The experience over the last two years has highlighted that such a model may be closer to reality than to science fiction. While most firms will settle on a hybrid working model, some trailblazers will seriously consider abandoning the office and in-person contact, relentlessly digitize, and where it isn’t core to value delivery, outsource every aspect of their business. Employees will self-select into these firms given their unique value proposition as will clients who value the prospect of lower fees and improved net performance over a higher touch experience.
8. Asset managers supercharge distribution.
The way of selling through financial intermediaries hasn’t changed much for decades; it remains a product-led sales process with basic performance illustrations and product explanations. This will change as asset managers take matters into their own hands and design digital advisory and reporting tools to help distributors elevate the end-client experience. It will transform client interactions from one of selling products to one of selling stories — stories that clients can connect with, emotionally and intellectually. This will supercharge distribution in ways that relying on traditional financial performance, risk profile and holdings-based conversations just can’t match.
9. China onshore build effort intensifies.
Amid regulatory intervention in the market and geo-political uncertainties, 2021 has seen the establishment and majority stake conversion of mutual fund companies, as well as announcements of more Sino-foreign wealth management joint ventures (an asset management entity, despite the name). As global players become fully operational, the focus will shift from obtaining the licenses to competing for business. More advanced global managers in China will begin to develop differentiated local strategies (e.g., ESG, REITs, cross-border, etc.), adapt to local distribution dynamics (e.g., use of WeChat, etc.), where the local requirement may constantly push the boundary of group-wide operating model principles.
10. Transformations, turnarounds, and transitions — M&A will reshape the industry in multiple ways.
Major industry players will consider mega deals and pursue M&A more actively as the needs of and benefits to scale become too big to ignore. This includes improved distribution reach; keeping up in the arms race for spending on advanced technology, data, and quantitative talent; gaining access to rapidly growing developing markets; and enhancing operating leverage. At the same time, private equity firms will selectively take over mature, bloated businesses (mid- and large-scale) and apply private equity value creation approaches to drive necessary changes that incumbent management teams have resisted. In other cases, they will accelerate their pace of activity in taking partial ownership positions in successful mid-sized firms (especially alts managers) where founders/executives are looking to “take some chips off the table” and partially monetize their ownership positions.
We hope these ideas give you some fodder to spark an interesting discussion. Do let us know if you would like to discuss anything in more detail.