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.