5.2 For asset managers
Asset managers need to consider how to respond to the direct-investing trends and challenges outlined in this report, particularly in terms of redefining their strategic position:
• Value chain: Asset managers must decide where and how to position themselves in the investment value chain in order to stand out in a more competitive environment. In particular, they may need to make a clearer choice between offering general asset management, becoming a specialist that focuses on particular asset classes based on their existing strengths, or helping institutions develop direct investing programmes by providing one or more specific elements of the value chain. Our research indicates that the value chain will continue to fragment, with winners identifying and occupying areas where they have a sustainable competitive advantage. This will foster vertical specialists, who offer an all-in service for investors in a particular asset class, and horizontal specialists in certain investment activities such as valuation, project management, legal, reporting and due diligence. To exploit this, asset managers may need to consider reshaping their business models, for example ”renting” investment capabilities to direct investors on an agency basis. This might involve offering some combination of deal sourcing, due diligence and deal monitoring services to direct investors, without making a commitment of capital.
• Client focus: Asset managers need to focus on the client segments or individual clients they are best able to serve, given each segment’s investment preferences and the asset manager’s comparative advantages. Top-quartile asset managers focus heavily on their long-term investment track record, whereas there is increasing evidence that track records are becoming less persistent than in the past. This suggests that successful asset managers will need to change their story to cover all elements of their value proposition and articulate how their services are tailored to the particular needs of institutional sub-segments. Moving quickly to partner with the right clients may help firms to scale up, better positioning them to compete with other asset managers and making them more attractive to the sellers of assets. In the future, asset managers may have to manage several different types of relationship with institutions, and address the question of whether it is efficient to offer different investing models under one roof (and brand).
• Stakeholder management: As direct-investing teams within major asset owners grow and mature, the asset managers’ relationship with their clients is changing. These in-house teams represent potential partners on some transactions, and competition on others. So, to the extent they represent an alternative option, this might create checks and balances on the activities of asset managers and, over time, a potential shift in asset managers’ business towards more specialist areas where they do not compete.
• Delivery of delegated investing: The direct-investing trend and its underlying drivers have begun to shape investor expectations with regard to traditional delegated investing. To win or retain significant mandates, asset managers will increasingly need to demonstrate how asset owners can retain control over their investments and build a more transparent investment portfolio. This may mean considering approaches beyond traditional investment mandates such as partnerships, cross-shareholdings or infrastructure sharing. Alternatively, supporting non-discretionary mandates, which allow institutions to retain key investment decisions over each asset while outsourcing resource-intensive tasks to the asset manager (such as due diligence and the day-to-day asset management), may enable retention of large asset owner clients who wish to take investment decisions themselves, but also wish to avoid the complication and overhead associated with implementing and operationalizing these decisions.
• Communication: Our interviews suggest that asset managers and service providers have not always been able to demonstrate the value for money, investment control and performance required by asset owners. Asset managers hoping to work with major investors will need to do more than demonstrate a good investment-performance track record. They will need to articulate how they can add value to the institution by addressing the asset-owner agenda above, e.g. in terms of helping direct investors focus on their particular strengths (rather than trying to do everything), or supplying hard-to-find investment talent in particular asset classes.