As we set our sights on the post-pandemic future amid an array of unknowns, one thing seems clear for those in asset management: The current situation will likely transform the asset management industry for years to come, and a rapid increase in digitalization is enabling much of this change. Asset management firms are contending with uncertainty over the future course of COVID-19, declining valuations, potential tax and regulatory developments, significant dry powder and liquidity constraints; against this backdrop the full scope of possible scenarios must be considered.
For asset managers looking to the long-term future for strategic recovery ― that is, the point at which they have reacted to the immediate needs of the situation and built in resilience to help the organization adapt longer term ― one of the biggest challenges is that we simply do not yet know whether or how the immediate environment will impact the longer-term economy. Based on our discussions with C-level executives, the jury is still out. Capital remains plentiful and, for now, debt remains widely available. However, government interventions have disrupted normal capital allocations. Deal-making has virtually halted as uncertainty makes it hard to complete transactions. In the long term, it remains to be seen how these developments may affect returns, discount rates, valuations and the other financial variables that inform business decisions.
COVID-19’s path may influence these variables even more. Events in Hong Kong, SAR, China and Singapore suggest that pockets of resurgence in various locations in future months may cause stop-start lockdowns that could prolong the recovery cycle. Governments that have rushed funds to support workers and businesses through a lockdown period believed to be in place for only a few months cannot provide such levels of support indefinitely. Struggling companies are asking how long they can continue to rely on this support.
What does seem clear is that the current situation seems to be restoring domestic governments as important administrators and supporters of last resort. Following the increasing protection of recent years and newly exposed supply chain vulnerabilities (e.g. for personal protective equipment, testing materials), we may expect domestic policies to retreat even further toward nationalism. And, if jurisdictions further tighten foreign investment controls and the cross-border movement of funds, the global free flow of capital could be disrupted. While we largely expect the globalization model to continue, we also expect more focus on mitigating risk within supply chains, especially in Western jurisdictions, and this could significantly affect trade patterns globally.
We expect big changes in the ways asset managers operate in the new environment. In our recent webcast poll, over 80 percent of respondents said they think COVID-19 will lead to significant changes to their organization’s operating model, and almost a quarter of respondents said these changes would be “very significant.”
For example, as we shift into recovery, the success of work-from-home arrangements could tilt the power balance from employer to employee. Although we do not expect legal rights to work from home to emerge, it seems likely that employers may no longer dictate, for example, whether an employee should travel for business meetings or work in the office versus at home. Companies may need to be more flexible in their HR policies and more creative in managing the resulting logistical, tax and immigration issues.
We expect another lasting legacy will be the digital transformation of the business. The ways many of us work, behave, report, monitor and communicate have abruptly transformed. Industries that were already shifting their operating models toward digitalization found it much easier to adapt to the current situation. Asset management has proved particularly resilient, adapting well to virtual working conditions in short order.
But as we enter the strategic phase, asset managers may find that they need to industrialize their ad hoc virtual workforce to operate efficiently and at scale for a longer term. For example, employees may have the equipment and connectivity to work from home, but do they have the bandwidth, cyber security and other capacities to support operations from home during peak work periods?
This is just one area where technology is coming into its own for asset managers, and this kind of strategic thinking suggests they may lean into technology even further. Recent years saw some asset managers gain competitive advantage by embedding digitalization across their processes — from targeting to valuations, due diligence and post-integration planning, to tax and regulatory compliance. Now many asset managers that were in mid-transformation before COVID-19 are asking us how they can do it faster, while those who remain largely analogue are asking how to get aboard. In our webcast poll, almost three-quarters of respondents said they expect COVID-19 would lead to significant changes in their organization’s technology. As with rising protectionism, virtual working and other trends already underway, COVID-19 has shifted asset managers’ digital transformation into higher gear, and we believe this may give them the agility and strength they need to meet whatever challenges the new reality may bring.
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Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides
no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.