Both traditional and alternative asset managers are in the midst of a challenging fundraising period. With institutional allocators becoming increasingly selective, managers need to demonstrate to prospective clients that their internal systems– including technology infrastructure–are of high-calibre.
An industry facing substantial pressures
Asset managers from across the spectrum are facing some tough macro headwinds. A number of active asset managers, for example, have struggled to navigate the recent market volatility and are experiencing substantial outflows as a result.
In the UK, investors pulled £23 billion from open ended funds, making it the worst year for outflows since Brexit. The situation is unlikely to improve in 2023, with S&P Global Ratings saying it was negative on the traditional fund management industry’s outlook.
Alternatives are facing similar problems. The private equity industry, for instance, is dealing with volatility in public markets and soaring inflation, which is saddling costs onto their portfolio companies.
Conscious that returns in private equity are likely to fall, limited partners are adopting a more cautious approach towards investing. For example, Preqin data found that global private equity fundraising between January 1, 2022 and September 30, 2022 stood at $574 billion, down from $726 billion in 2021 over the same period. The time required to raise private equity funds has also jumped, with final fund closes taking on average up to 20 months last year, an increase from 17 months in 2021 and 14 months in 2020.
Hedge fund performance was also down slightly in 2023, although managers still managed to attract $44 billion of new flows in Q3. In fact, inflows into hedge funds are expected to stay steady, as the industry largely navigated the recent market turbulence.
Investors want the best
Amid this testing fundraising environment, investors are focusing their attention and resources on only the best managers. While performance in aggregate has been down, the top quartile managers have excelled. Even so, investors want more than just compelling returns.
Due diligence teams are conducting in-depth assessments on managers and want full assurances that their internal processes and technology systems are robust. Even managers with top quartile performance have lost out during the mandate selection process, simply because their technology infrastructure was not up to scratch.
A reliance on poor technology opens managers and their investors up to multiple risks. Firstly, manual systems can lead to widespread inefficiencies, duplication or even serious errors, which in turn creates risk.
The ability of aging technology systems to meet the requirements of modern-day investors has also been called into question. Most notably, traditional technologies will struggle with the growing demands to deliver risk and performance information in a digital format to investors (or regulators) in real-time.
Those managers generating excellent returns, and who have also put effort into building up excellent technology systems – will be at an added advantage, when it comes to attracting mandates from prospective investors in what has become a highly competitive market.
