Prioritizing M&A, workforce and tech in a difficult economy
Asset management firms have demonstrated their resilience in a variety of ways over the past 12 months as a series of events has created severe challenges across the globe.
During the current economic downturn, asset management leaders are:
- Doubling down on their people focus to keep key employees
- Making strategic technology investments
- Improving their cybersecurity protections
- Debating whether to outsource or insource areas such as compliance, risk reporting, financial reporting, administration, valuation, etc.
- Reducing less profitable business segments and reducing the corresponding workforce supporting those segments
These strategies have helped asset management firms succeed in these very difficult times. In the Grant Thornton International Business Report (GTI) survey of mid-market companies for the second half of 2022, the percentage of asset management respondents expecting to increase profitability fell by double digits; however, 56% of these respondents still predicted that their profits would rise in the next 12 months. Asset managers are at an inflection point now, leaving a long-extended bull market and realigning their business in the short and long term.
18:54 | Transcript
Even in a challenging environment, these mid-market firms were confident in their resilience.
“Operational resilience is a key priority right now for all organizations due to regulatory pressure and client expectations,” said Shona O’Hea, Global Head of Asset Management for Grant Thornton International based in Dublin, Ireland. “Organizations have to ensure they can identify and adapt to potential operational disruption, and this requires coordination between risk management; business continuity and disaster recovery; third-party risk management and cybersecurity. Some hot topics firms are grappling with right now are uncertainty in macroeconomic climate, disruption in the form of democratization of distribution networks and the rise of digital assets. Organizations need to be actively horizon scanning to predict how this change will affect their business and how to react.”
Russia’s war in Ukraine, worldwide economic stagnation and the continuing global disruption related to the persistent COVID-19 pandemic have contributed to a sobering environment for asset management firms. The ongoing regulatory burden and increasingly complex technology landscape also have created challenges.
Showing resilience in subsectors
Asset management firms: Some firms are shifting operations from financial centers to states where tax burdens and office space costs are lower.
Private equity: Focusing on deal targets’ cybersecurity is helping PE firms increase value and reduce risk.
Registered investment companies: Updating compliance processes and procedures can lead to reduced risk.
It’s extremely difficult to grow anyone’s investment portfolio when stock markets are plunging at near double-digit rates. Sixty-one percent of asset management firm respondents reported optimism about their own economy in the second half of 2022. That’s the lowest optimism mark in the past five semiyearly GTI surveys.
In these conditions, leaders in the industry have had to be agile and innovative as they search for opportunities to grow. Asset management leaders are opening special-situation funds and creating products to capitalize on the environment and increasing focus on and exposure to more resilient investments such as real estate, according to Michael Patanella, National Managing Partner, Asset Management for Grant Thornton LLP.
Their resilience is keeping asset management firms on track.
“One of the key ways that asset managers stayed resilient was by communicating and preparing for what was ahead,” Patanella said. “Many asset managers had great insight that the market was changing, and they knew they needed to pull back in certain areas.”
Getting creative to maintain staffing
Three of four asset management respondents in the GTI survey identified labor costs as a key constraint as firms in the industry continue to face an extremely competitive staffing environment.
A huge majority (86%) expect to raise salaries in the next 12 months in a time when strong market returns seem unlikely. Patanella said some asset management firms are finding creative ways to provide more enticing compensation to its up-and-coming top talent.
“Hybrid is here to stay, and when managed it has proven to be a win-win for organizations and their people.”
“The pandemic caused a great drain of talent and individuals have moved to various states based on different wants and personal needs,” Patanella said. “Certain compensation will be given in phantom equity, as in many cases the fees and/or cash flows just aren’t available. It’s important to find ways to keep people. Investing has become much more difficult, so this is the worst time to have talent leave you.”
Flexible working will remain an issue for workforce managers for the foreseeable future. Many asset management duties can be performed largely remotely, but there’s a price to be paid for providing employees with the flexibility they crave. Collaboration, cultural cohesiveness and engagement can suffer when people are separated.
As a result, O’Hea said, many companies in all industries have increased their focus in recent months on getting people to return to the office — with mixed results. Some people have chosen to leave after being required to come back to the office. But for those who remain, O’Hea said, engagement has increased and team culture has been enhanced.
These experiences have caused many asset management firms to adopt hybrid working arrangements that permit a large amount of flexibility while also bringing people together to build morale and facilitate teamwork.
“Hybrid is here to stay,” O’Hea said, “and when managed, it has proven to be a win-win for organizations and their people.”
Other strategies asset management firms are pursuing to keep their staffing stable include:
- Focusing on sustainability. Some asset management firms are winning the loyalty of their employees by focusing on environmental stewardship; diversity, equity and inclusion; and community and other social initiatives.
- Outsourcing non-core activities. This is helping the most talented people at firms to increase their focus on core business duties.
- Growing talent at home and abroad. Some firms have found that offshoring can create knowledge gaps over time, so they’re focusing on developing talent at home. Meanwhile, global firms continue working within their global footprint to grow talent in different marketplaces.
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Automation on tap
Proceeding with caution on technology
Across virtually all industries, investing in technology can be a way to improve efficiency and customer service while creating strategic advantages.
But because asset management firms face fee pressures and a challenging market, their spending on technology will be strategic and targeted. Sixty-seven percent of the asset management respondents in the GTI survey reported that economic conditions are a key constraint for their business right now, so they are managing their budgets carefully.
Organizations recognize that they need to invest in technology to be relevant, but they have to be smarter with their investments, O’Hea said.
“While the drive to automate is still at the top of the agenda, there is a recognition that this might not deliver top-line cost savings that are as dramatic as intended, but it will create more robust processes, streamline internal operations and drive higher value-add activities,” she said.
Fifty-seven percent of GTI’s asset management respondents said they expected to increase their technology spending over the next year. One technology showing results, said Patanella, is predictive analytics that help leadership estimate with some level of certainty how market impacts will affect returns.
“The managers that have the foresight to keep the technology and automation projects going will be most successful,” Patanella said. “These types of investments are needs and really not wants, but it can be a struggle internally to keep the focus and align the finance and technology groups together.”
Other areas where O’Hea said technology investments remain important to consider include:
- Sustainability reporting
- Client onboarding
- Cybersecurity solutions
For a more comprehensive breakdown of technology opportunities and issues in asset management and other key industries, watch for Grant Thornton’s next multiple-industry feature in April.
Mitigating cyber risks
Strengthening cybersecurity is a must
The prevalence of digital business today makes it impossible to talk about resilience without mentioning cyber resilience. Asset management firms are responsible for protecting their clients’ assets and sensitive personal data in addition to the firms’ own processes and systems.
“There’s a real risk of cyberattacks that could have a very significant impact on the business.”
As client interfaces become increasingly sophisticated and firms use more automation, the SEC is expected to issue new regulations soon with new cybersecurity requirements that asset management firms will need to follow. Compliance is one objective; earning clients’ trust by protecting data and systems is another.
“This is a key issue affecting the firms that is at the forefront,” Patanella said. “There’s a real risk of cyberattacks that could have a very significant impact on the business. Firms are trying to mitigate some of the risk by obtaining insurance to offset the risk.”
As clients and regulators demand more transparency and enhanced risk management across the board, O’Hea said asset management firms will need to consider and assess cybersecurity in the wider context of firms’ overall operational resilience.
This can be a huge challenge at complex organizations with global footprints and networks of third-party providers along with a hybrid working environment. Meanwhile, cyber insurance providers are demanding that certain controls be implemented before they will even agree to provide coverage. In some instances, though, stronger controls can lead to reduced cyber insurance premiums.
M&A creates new opportunities
Mergers and acquisitions remain a prominent focus in asset management as scaling operations through acquisition has proven a successful way to survive and thrive in the uncertain environment.
Consolidation helps firms spread risks and opportunities across a larger client base, opening doors to new geographies and presenting opportunities to diversify products.
“We continue to see a trend of vertical integration, where organizations are expanding the breadth of services and products they can offer across the life cycle and supply chain, from advice through to distribution of services and beyond,” O’Hea said.
Of course, consolidation as a strategy comes with its own risks. First, a transaction is only successful if integration is carried out thoughtfully and skillfully. Merging talent, processes and systems can increase efficiency and effectiveness, but it’s critically important to create strong alignment within the first 90 days after a transaction.
Second, mergers can lead to increasingly complex operational structures that can bog down operations in bureaucracy. It’s important, therefore, to construct optimum operating models and determine how operations will be integrated either in-house or in partnerships with third-party providers.
O’Hea said common areas for outsourcing include:
- Anti-money laundering and know-your-customer
- Procurement and vendor management
- Finance operations and reporting
“This will continue in the coming years as talent shortages continue and cost reduction remains a key focus,” O’Hea said.
Where appropriate, consolidation can provide strength in numbers as organizations in asset management continue to display the resilience needed to succeed in challenging times.
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