Competition for new money continues to grow in the industry and with it, a new game plan.
According to a white paper by Broadridge released today, the compound annual organic growth rate — a key part of a firm’s enterprise value — is expected to slow from 3.9 percent over the last decade to 1.7 percent for the next 10 years, due largely to the lack of new areas to conquer.
While most firms increased their assets under management, thanks to bull markets and organic growth in a wide range of products, that is now beginning to slow. Just 22 out of the 50 largest managers were found to be growing faster than the industry average, heralding a “new era of competition in global asset management,” according to the paper. What differentiated the winners were what Broadridge referred to as “expanding incumbents,” managers who were able to adapt quickly to changes in the market in order to maintain their market share, and “innovative challengers” — those that had specific competitive advantages related to products, new forms of distribution, or delivery, and brand building.
“Despite holding 11 percent of overall industry AUM and only about 14 percent of the estimated cumulative five-year net flows, [innovative challengers] boast the fastest organic CAGR in the industry (17 percent) by a wide margin,” according to the report. The rest of the industry — a staggering 90 percent of firms worldwide — were comprised of weaker competitors. These managers, most of which relied primarily on capital markets, failed to grow because they over-diversified and stretched their resources.
In the current low-growth and oversupplied industry, investment performance alone was found to be insufficient for firms to keep growing. Instead Broadridge argued that firms need to adapt to trends facing the industry, including the growth shift from U.S. and Europe to Asia-Pacific, public to private markets, institutions to individuals, and lastly from broad mandates to thematic funds and strategies, such as environmental, social, and governance investing.
“Have a brand that stands out, have products that stand out, have distribution that you control because not everybody’s going to grow at the same rate,” said Ben Phillips, Broadridge’s Head of Asset Management Global Advisory Services.
Individual investors in particular are a significant growth area, as sovereign wealth funds start spending and defined benefit plans continue to shrink. U.S. private market fund flows are expected to increase from 19 percent of the total in the last decade to 36 percent for the next.
“I’ll tell you, about half the questions we’re getting are about how do we sell private equity and private capital to individual investors at smaller and smaller tickets,” said Phillips, who added that retail is the “big wave” that will drive the industry in the next ten years. “The private equity and private debt firms that we’ve been talking to, they’re really interested in the retail marketplace. They’re wondering, ‘How do we, how do we tap these new customers?’ They’re small tickets, but if we get a lot of them, it helps us grow.”
Tapping into retail, however, comes with its barriers. Two main issues stem from the education involved in new vehicles for mass retail investors and managing expectations for liquidity for a cohort that is not accustomed to semi-illiquid private assets.
