The latest report by the global consulting firm PwC predicts private equity markets to grow in the next five years. According to the report, published on Monday, private equity assets will reach $7 trillion by 2020. The report also predicts growth on alternative assets as a whole, although global monetary policy and gross domestic product levels can still influence the total growth levels.
The Alternative Asset Management Scene in 2020
PwC has previously looked into the changing alternative asset landscape. Its 2014 report, Asset Management 2020: A Brave New World, predicted that asset management would become the key focus in recent years.
Furthermore, the most recent report expects investor base to increase in the next five years. The report is predicting global alternative assets to reach over $13.6 trillion by 2020. It could be even more than that, as the ‘high-case scenario believes the growth could total over $15.3 trillion.
Private equity assets are thought to increase from $3.6 trillion in 2013 to an estimated $7 trillion by 2020.
The report found three trends that’ll drive global growth in assets. These are “a government-incentivised shift to individual retirement plans, the increase of high-net-worth-individuals from emerging populations and the growth of sovereign investors”.
Mike Greenstein, Global Alternative Asset Management Leader at PwC, was quoted in Bloomberg stating, “It’s really about broadening the client base. That’s in large part fuelled by the growth of the sovereign investors and the emerging markets in alternative assets, as well as the retail channel.”
Interestingly, PwC is expecting some major changes in the way fund managers and investors operate as well. These changes have already started, as many firms are changing their business model and operational structure. Furthermore, global private equity firms are especially interested in creating more clarity to their fee structure.
Changes in the Investor Channel
According to the report, sovereign investors will take a larger role in the asset management world. The report expects sovereign investors’ assets to grow by 6.2% and total $15.3 trillion by the end of 2020.
Sovereign investors are also increasingly global in terms of geography. No longer do you have investors only from North America and Europe, but the Middle East and Asia will have a larger share of sovereign investors as well.
The report predicts the growth of this investor group will also work towards changing the management methods in firms, as “they (sovereign investors) are transitioning from a model of hiring external asset managers to talent insourcing, and are hiring experts across asset classes, industries and geographies”.
In terms of private equity, PwC believes private equity allocations are going to account for 38% of alternative portfolios. At the moment, the proportion stands at 26%.
Streamlining Business Models
The broadening client base is expected to influence the business models of asset management companies as well. The report believes there will be three clearly focused sectors of firms focusing on their own unique business operations.
These company groups are diversified alternative firms, specialty firms and multi-strategy firms. They will focus on any of the three strategies of building, buying or borrowing. Depending on their specific tactics, the firms will also provide more customised solutions to investors.
This also means that focus on environmental, social and governance (ESG) issues will increase in the coming years. As we have reported previously, focus on ESG factors has constantly continued to become more important factor in making investment decisions.
Furthermore, partnership models will change by 2020. The report predicts, the change will happen in “the form of vertically integrated structural and economic relationships to facilitate economic and risk-sharing rather than the contractual fee for services model”.
Alternative Assets to Fill the Funding Gap
Furthermore, alternative assets such as private equity are to play a more important role as a funding alternative to traditional methods. For instance, in China the so-called shadow banking sector already represents 20% of all banking transactions. This proportion is likely to grow even more rapidly by 2020.
According to PwC, there will be increasing number of partnerships between the traditional banking sector and the big institutional investors. The partnership will be able to provide “integrated expertise in managing new asset classes and building products which often have limited liquidity but offer steady income flows”.
Enhancing the Industry’s Functionality
As the alternative asset industry is expected to grow rapidly in the coming years, the industry must also adjust to the changing size in a changing world. According to the PwC report, ”alternative firms increasingly recognise that incremental change won’t necessarily move the needle. In some cases, transformational change is required.”
The report points out a few different ways to approach this change. Among the ideas is focus on an “agile operating model” and a more streamlined operational structure. PwC’s analysts also believe asset management firms will need to learn to control operational risks better in order to survive.
On top of the above, the report expects there to be more focus on data. The industry has not previously invested a great deal in technology, but data will become increasingly important to asset managers and focus on data analysis will increase. CPI Financial noted, “the shift to data-informed decision-making will lead to improved organisational designs”, which in term can aid third-party administrators, business process outsourcing firms and other such vendors to make better decisions as well.
Durability and Profitability
According to the report, the key terms for alternative asset management for the next five years are durability and profitability. Firms looking to make it in the industry will need to make sure the two terms are under control in order to ensure they continue to grow together with the sector.
Greenstein said in the press release, “Those managers who are looking not just for growth but for sustainable growth, will develop their infrastructure, have a clear strategy and create robust organisational structures to exploit the opportunities that will emerge in the coming years”.
It’ll be interesting to see whether PwC’s higher or lower-end estimates end up getting closer to the actual asset numbers in 2020.
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