The alternative investment industry, which is at an inflection point, has never been so attractive to investors – or to managers, according to a Northern Trust whitepaper, which compares the industry to diamonds.
The white paper, ‘From Pressure Comes Diamonds: How industry forces will give way to a new level of maturity for alternative assets’, explores the pressures on fund managers.
“When a diamond is formed, carbon atoms come under high temperatures and crushing pressure, fall into efficient alignment, and ultimately give way to a valuable gemstone and one of the hardest naturally occurring substances,” the whitepaper says.
Northern Trust argues that in some ways, the alternative fund industry is going through a similar process; as capital continues to flow in from a wider array of sources, it increases pressure on how managers realise returns and meet the demands of their investors.
According to the whitepaper, projections indicate that the alternative asset industry will grow from $10.7 trillion to some $17 trillion by 2025, despite a temporary slowdown caused by COVID-19.
It is indicated in the paper that private capital (primarily private equity and private debt strategies) is expected to lead the way.
Asia-Pacific is predicted to grow particularly fast, with a forecasted compound annual growth ratio (CAGR) of 25.5 per cent over the next four years — more than twice the forecasted global rate of 9.8 per cent.
“It’s important to remember that these investment tailwinds come with the expectation of returns, and from a more diverse population of limited partners. The premium on capturing alpha is going up, with a two-sided cost impact of spending capital to support new strategies, and a rising cost of providing investors a compelling and transparent experience,” affirms Northern Trust.
Alternative asset managers’ response to these forces will determine when and how the industry evolves, the paper explains.
The current formative pressures facing the alternatives industry includes new products, strategies and distribution opportunities, elevated expectations for the limited partners experience, and regulatory evolution.
There is increasing regulation and greater scrutiny as the industry grows, which means more attention and focus must go to governance and compliance. Managers need good resources to help with objectives, Northern Trust highlights.
This includes going global (opening funds in different domiciles or regions, with the attendant regulation that follows), and adapting to new strategies as they expand their investments to incorporate opportunities like private debt or distressed assets.
Complying with privacy, anti-money laundering/know your client, registration and other laws in their chosen domiciles, and staying current with new and existing local and regional regulations that are increasingly applied to the alternatives industry, are also listed as important resources.
Meanwhile, the paper suggests that as investors push for greater and more frequent insight into the performance of their investments, holistic data management is a crucial dimension that managers have the opportunity to master.
According to Northern Trust, they should focus on extending the lens beyond just portfolios and deals to also report on treasury, financing, portfolio management, and balance sheet and cash optimization activities — making an effort to include exposures across countries, sectors, and even financing counterparties.
“Capturing and utilising this kind of data equips them to make more educated investment and operational decisions, ultimately increasing fund performance,” says Northern Trust.
Elsewhere in the paper, Northern Trust highlights that if alternative asset managers want to rise above the noise in attracting investors, they should focus not only on returns.
“When embarking on a new strategy, such as opening a special purpose acquisition company or making their funds available to defined contribution plan participants, investor communication is particularly important.”
The paper concludes: “Managers will need to be open and transparent about their investment strategy and plans, and will need systems and processes in place to communicate that to their core clients. Top-tier reporting and data have grown in importance to investors, and managers need to be equipped to meet these data needs with their technology, expertise and governance abilities.”
Click here to read the paper in full.
