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04 July 2024

What Does the Future Hold for Europe’s Investment Management Industry?

The landscape of the investment management industry in Europe is shifting, and there’s a lot of excitement about what the future holds. During our 16th annual Fund Administration Strategy Summit in Dublin, industry leaders gathered to explore the strategies shaping the industry. This year’s event brought together industry experts for a deep dive into the latest developments and insights. Through peer-to-peer roundtables and insightful discussions, we explored different types of system needs and other pivotal issues shaping the industry’s future. A highlight was the panel discussion, where I joined KKR and State Street leaders to discuss the trends and challenges we’re all navigating.

Hot Investment Growth Trends

  1. Alternatives on the Rise
    One of the most prominent trends is the rise of alternatives, particularly private markets. In 2023, alternatives accounted for a significant portion, approximately one-fifth, of institutional portfolios. This surge is largely due to the higher yields they offer compared to public debt and their ability to hedge against inflation with floating-rate loans. While U.S. investors are leading the charge, there’s also growing interest in Europe and Asia.
  2. The Appeal of Hybrid Funds
    Hybrid funds combine liquid and private market strategies within a single vehicle, making them increasingly popular. These funds strike a balance that’s particularly attractive to wealthy individual investors, offering exposure to private asset classes while maintaining some level of liquidity. This blend of stability and growth potential is highly appealing in today’s market.
  3. Middle Eastern Wealth Hub
    Another noteworthy trend is the emergence of the Middle East as a burgeoning wealth hub. The region’s ultra-high-net-worth and mass-affluent populations are growing rapidly, with more wealth being retained locally. This trend is attracting multinational wealth management providers eager to tap into this expanding market.

Cooling Sectors

Not all sectors are heating up; some are experiencing a noticeable cooling.

  1. Crypto Volatility
    Cryptocurrencies are facing significant hurdles. The volatility and the complexities and costs associated with trading, administration, and compliance hamper wider investor adoption. While interest in crypto remains, these challenges are proving to be formidable barriers.
  2. ESG Investing Challenges
    ESG investing is another area grappling with obstacles. Despite high demand, compliance and disclosure issues continue to pose significant challenges. Many fund managers are also struggling with upcoming Sustainability Disclosure Requirements, highlighting the urgent need for standardised ESG data and tech solutions.

Overcoming Operational Barriers

Operational efficiency is crucial for the success of investment management, and several barriers must be addressed.

  1. Data Challenges
    Accurate and fast data is essential for informed investment decisions and transparency. However, collecting and normalizing data, especially for private market investments, is labour-intensive and challenging.
  2. Complex Accounting
    The bespoke terms and irregular cash flows characteristic of private credit arrangements necessitate sophisticated accounting and reporting. This complexity is particularly pronounced for managers targeting private equity and infrastructure funds, who need to frequently review and value assets to monitor risks effectively.
  3. Customised Fees
    Institutional clients are increasingly pushing for lower fees and more flexible arrangements. This demand leads to complex side letters and detailed waterfall calculations, adding to the operational burden.

The Automation Solution

Automation and technology are key to overcoming these challenges and driving scalability.

  1. AI and Managed Services
    AI tools can significantly enhance investment decisions and operational efficiency. However, they require skilled expertise and careful data privacy and governance management. Managed services are also becoming crucial as asset managers seek to outsource middle- and back-office tasks to reduce costs and focus on core activities.
  2. Leveraging Technology
    Platforms like SS&C Geneva® are revolutionising the industry by integrating portfolio and investor accounting to provide transparency at both levels. They handle various fund structures and support diverse terms for accrual, cash flow, and fee calculations, making the investment process more efficient and less labour-intensive.

The investment management industry in Europe and the Middle East is at a pivotal juncture, with significant growth opportunities in alternatives and hybrid funds, while facing challenges in sectors like crypto and ESG investing. By leveraging technology and embracing automation, the industry can overcome operational barriers and drive scalability. The future is bright for those who adapt and innovate, ensuring that both regions remain key players in the global investment landscape.

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