Building for the Future

Building for the Future

How alternative investment managers are rising to the demographic challenge

May 2016
Alan Flanagan   |   Global Head of Private Equity & Real Estate Fund Services, Alternative Investment Services
Ned Siegel   |   Director, Business Development, BNY Mellon Alternative Investment Services
Brian McMahon   |   Business Development Executive in Luxembourg, BNY Mellon Alternative Investment Services

Illustration of group taking photo

Increasing Investor Demand for Real Assets

The alternative investment industry* has been presented with a unique historic opportunity. On the one hand, a combination of disparate, but profound and deep-rooted forces – macroeconomic, demographic, environmental – are driving an unprecedented, broad-based demand for investment in real assets, property and infrastructure, in both developed and emerging markets. On the other hand, institutional investors are hungry for yield, but starved of attractive investment options. Low interest rates and asset-price inflation fueled by quantitative easing (QE) are forcing investors to look further afield for returns, but periodic financial market shocks and a rolling programme of capital, prudential and market structure reforms are fraying investors’ nerves. As such, institutional investors are increasingly looking to the alternative sector to guide them through fast-changing and sometimes unfamiliar terrain, and to shed light on new opportunities that satisfy their investment criteria. To meet this challenge effectively, alternative investment managers will not only need scalable investment expertise to identify and value a wide range of assets and businesses, but also a flexible business model that enables them to deliver on heightened expectations for transparency and client service, while achieving sustainable growth.

In this paper, we will highlight some of the key trends that are influencing institutional investor’s appetite for alternative investments and their implications for fund managers. In the first part of the paper we identify and explore a number of themes that are already beginning to stoke a long-term, secular shift in institutional investment, effectively mobilising private capital in response to changes in funding needs dictated by macro-economic and demographic shifts. The second part considers the role of fund managers in supporting this significant evolution in investment priorities, setting the opportunities and challenges of growing allocation to alternative investments in the context of existing business priorities and dynamics: increasing levels of competition; heightened regulatory and client expectations for transparency.

BNY Mellon is delighted to partner with Preqin Ltd. to provide this detailed, statistical snapshot of how alternative investment managers view their current challenges and future prospects, as well as their evolving attitudes toward business and operating models as they build for growth, based on Preqin’s survey of 340 fund managers. Whether ramping up your existing presence or identifying ways to tackle new and complex challenges, we hope you will use this paper as valuable input into your strategies. We look forward to sharing our insights and working with you as you think about your own strategies and the future of this industry.

* For the purposes of this paper, we define the alternative investment industry as including hedge funds, funds of funds, private equity funds, real estate funds, debt funds and infrastructure funds.

Executive Summary

  • Fundamental demographic and macroeconomic shifts are creating investment demands that far outstrip the reach of government finances, and must be met by alternative capital sources;
  • Population growth in Africa and parts of Asia will be a strong driver of GDP levels, increasing demand for transport and communications infrastructure to support commerce, and driving up consumer spending; population aging in all regions will impact medical and social infrastructure needs;
  • Greater urbanisation will increase pressure on transport, communication and social infrastructure as well as housing in all regions, but the more rapid the growth, and the lower the existing levels of development, the greater the need for planning and investment;
  • In developed economies especially, the large Millennial cohort will favour multifamily, rental accommodation in thriving urban centers, over traditional suburban home-ownership, while also driving a radical re-purposing of retail and office real estate;
  • Long-term shifts in public finances are creating a severe infrastructure funding gap, but are also providing a widening range of opportunities for private investment in energy (especially green initiatives), utilities, transport and communications infrastructures;
  • Driven by poor absolute returns in traditional asset classes and the need for diversification in current macro-economic conditions, investors are already increasing allocations to real assets, including infrastructure, pushing up valuations in mature investments / developed economies;
  • To channel investment flows into a widening range of opportunities – thereby growing market share, serving client needs and meeting the aforementioned funding gap – alternative investment managers must adopt more flexible business and operating models.

 

In a companion video to this paper, Alan Flanagan, Global Head of Private Equity and Real Estate, discusses current trends in allocations to real assets and how the industry is adapting to change. He also discusses the important role that investing in real assets plays in people’s everyday lives.

READ TRANSCRIPT (PDF - 157 KB)

 

The Demand Side – Growth, Diversity and Renewal on a Global Scale

A number of powerful forces are combining to generate a seismic shift in demand for capital in real estate and infrastructure. The outcomes vary globally, in terms of investment requirements, but collectively they represent a challenge for institutional investors and alternative asset managers. Though not exhaustive, this section provides investors and asset managers with a flavour of the size, scale and scope of the forces that are driving future investment needs.

Topics covered in this section:

  • Global Demographics: Lower Fertility - Longer Lives
  • Urban Sprawl: A Worldwide Phenomenon
  • The Millennial Question: Delayed Decisions or Permanent Shifts?
  • Infrastructure Renewal: Mind the Funding Gap

READ MORE (PDF - 590 KB)

Illustration of group bidding on real estate


The Supply Side – Channelling Investment; Delivering Value

Investor appetite for alternatives has risen steadily over the past decade, notably for funds that expose investors to the trends referred to in the previous section. But this still-growing secular shift in allocations requires change in the business and operating models of alternative investment managers. Simultaneously, the industry is also being re-shaped by structural developments in the financial markets, changes in regulation, and increased client service expectations. In this section we look at how fund managers are responding to this fast-evolving landscape and identify areas for development, differentiation and efficiency, based on analysis of key trends and statistical data.

In collaboration with BNY Mellon, Preqin, a provider of data and intelligence for the alternative assets industry, surveyed 340 private equity, real estate and infrastructure fund managers on key challenges they are facing in the next 12 months, including deal flow, raising capital from institutional investors and regulation.

Topics covered in this section:

  • Investor Appetite
  • Competition and Diversification
  • New Models, New Transparency
  • 2020 Vision

READ MORE (PDF - 1.7 MB)


2020 Vision

The growth of the private equity, real estate and infrastructure industries over the past decade through difficult market conditions has been impressive; AUM now stands at $4.17 trillion and there is no sign of this growth slowing. The marketplace has become increasingly crowded and competitive, creating even more challenges for fund managers to successfully deploy the capital they have secured from investors and to create sufficient value to distribute back to those investors.

Regulatory requirements and transparency expectations also present further challenges. Even though institutional investor appetite is currently strong, effective differentiation and mindfulness of investors’ need for transparency in reporting and operations will be essential to their future operations.

"60% of infrastructure fund managers surveyed expect the assets under management to increase by at least 50% over the next five years, reflecting its current state of maturity and growth potential versus private equity or real estate."

READ MORE OF OUR 2020 VISION (PDF - 1.7 MB)

ABOUT THE SURVEY

In collaboration with BNY Mellon, Preqin surveyed 340 fund managers globally operating in the private equity, real estate and infrastructure industries to find out the key challenges fund managers are facing in the next 12 months, including deal flow, raising capital from institutional investors and regulation. We also look at their plans for the coming year, as well as their long-term outlook for the alternative assets industry.

Study participants:

Forty-five percent of respondents were based in North America, with a further 30% headquartered in Europe. The remaining 25% were located across Asia (10%), Australasia (5%), Latin America (4%), MENA (3%) and Sub-Saharan Africa (3%). The vast majority (94%) of respondents have less than five offices, while 4% have between six and 10 offices. Just over three-quarters (77%) of respondents operate in fewer than five countries, with a further 18% investing in between six and 15 countries. Six percent of respondents invest in more than 16 countries.

Just over half (54%) of respondents have less than $500mn in assets under management (AUM), while 13% have between $500 million and $1 billion in AUM. A third of respondents have more than $1 billion in AUM.

ABOUT PREQIN

Preqin, a source of data and intelligence for the alternative assets industry was founded in 2003, and operates from offices in New York, London, Singapore, San Francisco, Hong Kong and Manila. They are an independent business owned by their directors and employees. Preqin’s products and services are utilised by more than 40,000 professionals located in over 90 countries for a range of activities including investor relations, fundraising and marketing, and market research.

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