How Investment Managers Are Rewriting the Playbook for Growth

For nearly two decades, asset management companies enjoyed robust returns from their public markets investments. A Boston Consulting Group report citing the exceptional global equity returns from 2012 to 2021 noted that “90% of [asset managers’] revenue growth came from market performance since 2006 — more than enough to offset high costs, pressure on fees, and strong capital inflows from low-fee products.”¹

Then markets sank in 2022. Coupled with higher-than-expected interest rates, economic and political turbulence, and waning central bank stimulus, the downturn in market revenues escalated many investment firms’ eagerness to adopt a new playbook, one that embraced private markets investments. Increasingly, traditional asset managers and private markets investors are vying for the same investment opportunities, creating a cross-asset class convergence.

Asset managers are also contending with other negative effects on their revenues:

• Fees, once a source of dependable income, have contracted, down by more than 15% since 2010.¹
• Pooled securities encompassing both private and public investments, such as ETFs, have gained a strong foothold, in the U.S. in particular.
• New product launches have intermittent success. According to the Boston Consulting Group report, “less than 40% of all products launched 10 years ago are still offered, compared with 60% of all 10-year-old funds in 2010.”

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Pivoting to a public-private mix

During the same time period the public equities market provided reliable returns, market conditions also evolved to provide a favorable environment for the large pool of private markets investments — private equity, debt, infrastructure, venture capital, growth capital, and natural resources. Multiple factors, including regulatory reform and various burdens on public companies, have encouraged companies to stay private longer, positioning private markets as the mainstage for many early investment opportunities. In addition to offering innovation in many investors’ minds, private markets’ very real outperformance of public markets has caught the attention of individual as well as institutional investors.

Asset managers can also see trailblazing competitors, early to expand their product offerings to include private markets investments, have developed new avenues for growth, with performance results in both higher AUM and revenue. In addition to better returns, these firms are gaining the benefit of greater diversification, lower volatility, and stronger appeal to new investors.

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Convergence and incongruity

This reshaping of asset managers’ product mix has many implications, including impacts on operations and, fundamentally, the data systems that support them. Integrating private investments also means incorporating their related partners, vendors, and administrators as well as the information fundamental to those investments. Asset management firms have used a variety of models to achieve consolidation, but they often result in siloed data systems that don’t provide the information managers need for informed decision-making — or they require excessive manual efforts to do so.

That is because the private markets are materially different from public markets:

• The investment horizons and capital lock-ups are longer.
• Capital raises are greater.
• Valuations are calculated on a different schedule and using different information.
• The speed of deal execution and external party activity is slower while fund structures are more complex.
• The requirements for support teams and their expertise are unique and more specialized.
• The data platforms successfully supporting public markets portfolios fall short of accommodating private markets investments.

To fully optimize private markets opportunities and product transformation, including offering what investors have come to expect in the public markets space within the illiquid investment environment, asset managers need to re-platform their existing systems.

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Fulfilling the opportunity

An agile data platform that draws upon a single source of trustworthy data allows liquid and illiquid investment teams to work together effectively. Equally important, it enables a company to contend in a fiercely competitive marketplace. There are various ways to build a data framework like this. For example, a company’s shared data platform can unify data and operations to allow for aggregation of holdings, performance, cash flows, risk analytics, and reporting while also supporting the ability to maintain separate specialized front-office systems.

As part of this framework-building exercise, firms must also understand their operational needs — people, processes, and systems — which extends their potential for transformation.

Reorganizing or reimagining an organization’s capital allocation structure and operating model can make taking advantage of these investment opportunities more cost-effective and efficient, as well as position your firm to compete in this new financial landscape.

To learn more about how to structure a data platform across the lifecycle of public and private markets platforms, see Your Data Framework Guide to Public and Private Convergence.

Sources:

1 The Tide Has Turned, Boston Consulting Group, May 2023