The global private equity industry is expected to continue its growth trajectory enjoyed pre-Covid 19. As a further tailwind in the New Reality, the monetary policy response of central banks means alternative investment strategies like private equity have become more attractive to institutional allocators in their search for yield. Furthermore, PE firms are attracted to the opportunities that are expected to arise in the New Reality – in sectors such as healthcare, supply chain technology, and online media services.
The Channel Islands are well positioned to be part of the global growth story. Private Equity remains the dominant asset class, with over 1/8th of global PE capital serviced there through investment funds. There is a long history of major European PE firms using the islands as a domicile since the early 90’s. Today, Jersey and Guernsey are home to many PE firms with a physical presence in the jurisdiction, as well as thousands of professionals skilled in the delivery of services to the private equity ecosystem. The islands are regarded for being a centre of excellence in delivering a range of services to both foreign and locally domiciled PE funds. They are one of the few financial centres in the world with this level of skills concentration.
1. Redefining business and operating models
What it means
COVID-19 has crystallized the need for asset managers to transform business and operating models to become more resilient, agile and flexible in a challenging environment.
Potential impact on asset managers
- Digital or bust – a greater sense of urgency to digitize operations and client interactions
- Resilience of the supply chain and third party due diligence may be key
- Partnerships (e.g., with FinTechs) will likely drive innovation and improve access to markets and customers
What to think about:
- Strategic evaluation – where will you play in an evolving market?
- Digital transformation – how can you expedite digital solutions and emerging technologies?
- Partnerships – have you identified partners, to co-develop and distribute products and services to advisors and retail investors?
2. Accelerating digital, transforming through technology
What it means
The industry has been slower to adopt new technologies than many other sectors. COVID-19 has been an awakening
Potential impact on asset managers
- Increasing numbers of fund managers will work with technology providers and platforms that offer scalable processes and tools
- Internal capabilities will be rapidly built out – with cloud the foundation
- Automation and artificial intelligence will proliferate enhancing digital channels and improving the investor experience
What to think about:
- Intelligent automation & emerging technologies – where should you accelerate automation at scale and increase the use of innovative technologies?
- Digital interactions – how will you develop new digital capabilities for investment advisors and relationship managers?
- Cyber security – in a digital world, cyber threats could rise. Do you have sufficiently robust protocols and protections for the new environments your business is moving into?
3. An evolving risk & regulatory landscape
What it means
Regulators want to encourage recovery and growth, but ensure that happens in a controlled way that protects financial stability and takes greater care of customers.
Potential impact on asset managers
- Operational resilience will move to the top of the agenda – business continuity planning, cyber security, AML
- Regulators will expect technology to make investing simpler and cheaper for investors – but be safe and secure too
- Firms will be expected to put clients’ interests before their own, with a strong focus on stewardship
What to think about:
- Re-evaluate processes and controls to ensure operational resilience
- Enhance your stress testing scenarios of systemic risks such as liquidity management and leverage
- Think about ‘what you should do’, not ‘whether you can do it’: individual accountability, culture/ethics, governance
4. Redesigning the future of work
What it means
Operating in a more decentralized environment has focused minds on the need for change as a new future of work emerges.
Potential impact on asset managers
- Asset managers will rethink how, when and where they operate. Attitudes about what activities happen in the office could continue to evolve.
- Office space will be re-evaluated; working from home some of the week will be a permanent feature for many, if not most
- Many other factors come into play: Corporate purpose, positive impact on communities, compelling value propositions, connected communities, seamless interfaces – all will be critical
What to think about:
- Are you delivering a digitally augmented experience for staff?
- Are your people development, performance management and reward frameworks fit for the future model of working?
5. Embedding ESG across the investment approach
What it means
The shift towards sustainable finance has markedly accelerated. In the wake of COVID-19, this trend will be even more pronounced.
Potential impact on asset managers
- ESG becomes a strategic issue that must be embraced across every aspect of business models, operations and communications
- It’s not only a question of climate and carbon. An interconnected world means societal issues, other environmental factors, business ethics, equality, governance, values – all are critical
What to think about:
- Is your business demonstrating a strategic approach on ESG aspects and principles?
- Are your ESG-related disclosures and communications supported by credible data and evidence?
- Think about involving independent advisors in designing your approach and providing assurance
6. Look East: navigating business opportunities in China
What it means
China has long been recognized as the biggest single opportunity for new business and growth in the asset management industry – COVID-19 hasn’t changed that.
Potential impact on asset managers
Beyond a world dominated by COVID-19-related restrictions on economic activity, we anticipate opportunities for fund managers to either expand their existing footprint or enter China for the first time.
- Recent regulatory developments indicate a positive direction of travel for doing business in the future in China. These include:
- the relaxation of foreign ownership restrictions - such as the scrapping of foreign ownership caps on retail fund management companies this April.
- the expansion of offshore investment opportunities - including plans to launch a Greater Bay Area (GBA) Wealth Management Scheme, which will enhance cross-boundary flow of investment products.
- For companies with an existing presence in mainland China, evolving their current operating models into a coherent target state will be a critical objective, while those who have not yet established a presence may need to carefully consider their options for market entry
- Hong Kong (SAR) has long been seen as a gateway into the rest of China. KPMG research conducted amongst HKIFA member institutions found a positive outlook for the future of Hong Kong’s fund management industry, underpinned by the city’s experienced talent pool, product diversity, open market, robust regulatory framework and proximity to mainland China
What to think about:
- Do you have a ‘China strategy’ with clearly defined goals, targets and safeguards?
- What will your China operating model be?
Whatever the strategy and model may be, it is clear a considerable amount of investment is needed for entering the Chinese market, meeting local regulations and guidelines, setting up infrastructure, building up brand recognition, hiring the right talent and adapting to the local culture. But given the potential size of the reward, many (if not most) non-Chinese asset managers are thinking long and hard about what it will take to succeed in this growing, dynamic and volatile market.
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