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Portfolio > Asset Managers

Alternative Assets Will Grow to $15.3 Trillion in Five Years: PwC

By Michael S. Fischer

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Global alternative assets are on track to increase to $15.3 trillion by 2020, PwC reported Monday.

Over the next five years, alternative asset managers will drive growth by calibrating their business and operations, and making technology a top investment priority, the report said.

According to PwC, a dynamic global economic environment has pushed asset management to the forefront of social economic change, and the need for sustainable long-term investment returns has put the spotlight on alternative asset classes.

Many alternative managers will shift to accessing new distribution channels and creating a broader asset class and product mix.

The report said some firms would still try to become more institutionalized, but brand-name players would strive to build industrial-strength operational platforms by revamping their business and infrastructure to be more agile, durable and scalable, with a high degree of efficiency and operating leverage.

Assets under management in the developing world will grow faster than those in the developed world, with the biggest allocation increases likely to go to private equity, real estate and infrastructure, according to PwC.

“The shift in global economic power from developed to developing regions will drive continued focus on sovereign investors, fast-growing institutions and the emerging middle classes in new markets,” PwC’s global alternative asset management leader Mike Greenstein said in a statement.

“These groups of investors will increasingly seek branded multi-capability alternative investment firms. Currently, a number of alternative firms exist in this category and others will aspire to join them.”

Growth Strategies

The new PwC report predicted that alternative firms and traditional ones trying to break into the alternatives sector would pursue one or more of three possible growth strategies:

  • Building: looking inward for growth, leveraging their existing capabilities and talent
  • Buying: seeking to acquire talent, track record and scale overnight
  • Borrowing: partnering with other financial institutions to expand their capabilities and distribution channels

According to the report, alternative managers would likely develop increasingly sophisticated market strategies, focused more on distribution channels and better recognized brands.

Many firms will put more resources into figuring out in which investor channels they want to play, how profitable each one is and how to optimize the channels they select.

PwC said it expected alternative asset managers to continue moving into activities such as lending, securitization and financing, areas traditionally dominated by banks, as the funding gap continues to present new opportunities.

The report said managers would likely create partnerships with banks and the largest institutional investors, offering integrated expertise in managing new asset classes and building customized products. Finally, PwC expected alternative managers to offer liquid alternatives and other permanent capital vehicles in response to investors’ demand for standardized products.

Technology’s Ascendance

Although investment in technology has not been a chief priority for many alternative firms, this will change over the next five years.

By 2020, PwC said, a shift to data-informed decision-making will lead to improved organizational designs that more effectively use of third-party administrators, business process outsourcing firms and other vendors to achieve operational and cost efficiency.

“Most firms will recognize that success in generating alpha — measuring performance on a risk-adjusted basis — does not on its own guarantee success as an organization,” Greenstein said.

 “Managers who are looking not just for growth but for sustainable growth, will develop their infrastructure, have a clear strategy and create robust organizational structures to exploit the opportunities that will emerge in the coming years.”

They will continue to manage highly disparate strategies that leverage unique skill sets, Greenstein said. However, as a group, they will start to look more homogenous in their operations as they strive to create “industrial strength” in their operations and processes.

— Check out 10 Phrases to Avoid When Talking About Alt Investments on ThinkAdvisor.

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