The glut of capital flowing into private equity, asset management, and hedge funds has touched off fee wars and a proliferation of firms in all three industry segments.
As competition intensifies and global growth shows signs of slowing, firms are increasingly adopting new tactics for the age-old proving ground of fundraising that, surprisingly, largely eschew scale in favor of customization.
Fund managers have struggled to curry favor with the investment consultants that advise US institutional investors. Pension funds are increasingly giving those “gatekeepers,” which represent roughly two-thirds of institutional assets in the US, discretionary authority over asset allocations.
While fund managers covet investment consultants’ recommendations, they also complain that investment consultants’ time-consuming due diligence diverts them from managing their portfolios. The problem has grown more acute as investment consultants have proliferated.
The converse is also true: As funds have multiplied, investment consultants have struggled in vain to keep institutional investors apprised of the panoply of offerings.
At the root of those issues lies a conundrum of institutional investing: The drive for scale undermines the push for personal attention, and vice versa. To address that dilemma, funds have enlisted a variety of sometimes counterintuitive tactics privileging customization over scale.
Despite competitive pressures that have ushered in an age of industry contraction, asset managers are beefing up their fundraising and marketing teams — particularly in the less visible areas of private credit and real estate. Hiring activity in private credit spiked 76.7% YoY in 2018.
Some hedge funds are meanwhile tailoring their offerings to specific clients. $18B UK hedge fund CQS, which hired ex-LSE CEO Xavier Rolet in December, seeks to expand its reach into the US using “‘bespoke strategies with bespoke fees’” that cater to the world’s largest institutional investors.
The move seems to defy the logic of scale. But CQS is courting the very largest institutional investors — a trend that is “becoming increasingly common in the hedge fund and broader alternative-investment industry.” A quarter of 2018 hedge fund inflows were invested in customized funds known as “funds-of-one.”
The same idea is spreading to private equity, where investors are exploring alternative fund structures that proffer lower fees, greater customization, a bigger say in investments, and more input on the timing of exit strategies.
Institutional investors seeking greater control have also sought to manage their own assets rather than turning to external money managers. Long the practice of around 80% of Canadian pension funds, insourcing of asset management is slowly emerging as a competitive counterweight to traditional asset management services in the US as well.
Those trends highlight a recurring theme of money management: Money, returns, and influence are sufficiently concentrated at the top of the space to cut against the grain of technology-driven democratization that’s transformed other corners of finance — at least for now.
In the near term, that reality will likely intensify pressure on middle-market money managers and institutional investors alike to scale their operations according to a more restrictive calculus than industry behemoths.
As in other industry segments, those dynamics present an opportunity for fintech providers that can deploy services to help close the gap.