Our latest report from PwC shines a very positive light on Alternative Funds, which make up the largest component of funds in the Channel Islands, but also calls for evolution of global asset management to respond to major societal change.
The report - Asset and wealth management revolution: The power to shape the future - can be downloaded below and highlights that global assets under management (AuM) have grown by more than 40% in the past five years, currently sitting at more than US$110tn. Across the world, Institutional investors - key investors into the majority of Channel Island funds - hold more than 40% of global market capitalisation, but this figure is notably higher in some markets, for example 72% in the US.
The report highlights that growth in both passive funds and alternative investments is continuing. Although active investments still make up most AuM globally, alternatives are seen as the greatest opportunity for market-beating performance and is the biggest growing strategy within global asset management, with a compound annual growth rate of 6.8% predicted to 2025 to $18.9tn.
"If this growth rate can be applied to Channel Islands funds over the next five years, we can expect a level of over £800bn in assets from current levels of over £580bn."
Within alternatives, we are seeing the expansion of private markets. Public market investment in equities and corporate and sovereign bonds will continue to be a significant source of capital and lending. Yet, with record levels of dry powder to put to work, it’s private markets that could provide the main springboard for recovery. Private equity investment could help turn around businesses in sectors hardest hit by COVID-19, such as hospitality, travel and leisure, and address the growing importance of ESG and digital engagement with investors.
Although smaller in total amount of AuM than private equity, private credit will also play a key role in funding the future. Regulations put in place after the global financial crisis of 2008 to 2009 have increased the cost differential between regulated and unregulated capital, significantly boosting the role of non-bank capital providers. Having expanded rapidly since 2010, non-bank lending to the private non-financial sector now exceeds bank lending in advanced economies. Recent growth in private credit funds in both Islands is set to continue, especially in non-EU credit markets.
The role of Alternative asset management in funding global growth is also highlighted, making up infrastructure investment shortfalls, especially from government. In developed markets, there are considerable openings to refurbish roads, airports, hospitals and other such infrastructure while accelerating developments in areas such as 5G and renewable energy. There is an even greater need for investment in emerging markets, both in traditional areas and in the new digital infrastructure, as we see increased urbanisation. As a result, the report expects AuM in infrastructure funds to double by 2025, with alternatives playing a central role in getting economies back on their feet and laying a foundation for growth while boosting risk-adjusted financial return.
The report also highlights that Investors are putting the environmental and social profile of asset managers on a level playing field with financial return. There will continue to be markets and investor groups that consider ESG to be a peripheral concern. However, if investors place less priority on ESG, there remains a question as to whether they will miss out on arguably the most significant commercial development in money management since the creation of ETFs two decades ago. In European markets that are leading the way on embedding ESG, PwC analysis indicates that ESG assets will make up between 41% and 57% of total mutual fund assets by 2025. And more than 75% of European institutional investors surveyed this year by PwC said they plan to stop buying European non-ESG products within the next two years.
Asset managers, administrators and other service providers alike will need to be able to demonstrate a credible story on ESG, with greater verification of non-financial data being required in the future.
"Focus on ESG in both Islands in recent years is clearly well-placed and must continue to grow in meaningful ways if the Islands are to be relevant in this key emerging market. With both Islands looking to commit to ambitious on-island net zero emissions targets, a focus on helping AuM align with a net zero emissions future would further demonstrate our commitment."
The CI finds itself at the centre of continued growth in a sector where we are well established and have strong credentials. But like any revolution there will be winners and losers and there are no guarantees the Channel Islands will be on the winning side. Other jurisdictions are beginning to pivot towards alternatives too as they grow in popularity.
As this asset and wealth management revolution unfolds, the power to shape our future in the Channel Islands is in our hands….for now.
"If we are to grab a share of this growth we need a relentless focus on staying relevant - through leading edge tech and innovation; top talent in our market and maintaining trust and credibility and building our credentials and capability in ESG."