How asset servicers are helping the funds industry transform itself

Investing in new asset classes, such as private markets, creates challenges for investment firms, while distributing funds into the European Union (EU) is less straightforward than what it used to be for UK managers since Brexit. Engaging with a strategic partner, that offers both multi-asset class support and strong EU coverage, will be essential for UK asset managers if they are to thrive in today’s highly competitive environment.

The rush into private markets

With ongoing market volatility and the demand for stickier investor money, a growing number of asset managers - including traditional long-only firms and hedge funds - are branching out into the world of private markets, such as private equity, private debt, real estate, venture capital and infrastructure.

This comes following significant withdrawals from active managers lately, sparked mostly by disappointing returns but also growing competition from lower cost, passive alternatives. In the UK, for example, investors withdrew £13.6 billion from public equity funds in 2023, up from £12 billion in 2022.¹

In contrast, private capital managers have weathered recent market conditions much better.

Although increased interest rates and lingering inflationary fears have led to a slowdown in private equity fundraising, data from Bain & Co calculates the asset class still amassed $1.2 trillion in 2023.²  

Overall, the private markets industry grew by 12% in 2023 (as of June) bringing their Assets under Management (AuM) up to $13.1 trillion, making last year the sixth best fundraising year on record, according to McKinsey.³

Nonetheless, a transition to private markets will raise numerous challenges for asset managers.

Richard Davis, UK Sales Director at Societe Generale Securities Services (SGSS) said:

Although launching private market funds can help firms attract new investors, it requires managers to completely rethink their operations as the fund structures and underlying portfolio assets are typically a lot more complex and different to what they are used to managing.

Making a strategic play in Europe

Together with strategy diversification, UK asset managers are also reaching out to EU investors as they look to widen their client base.

This renewed interest comes as EU investors continue to increase their fund allocations.

Data from the European Fund and Asset Management Association (EFAMA) shows that fund ownership in Europe has doubled in the 10 years since 2012 from €7.4 trillion to €15 trillion, with pension funds and insurance companies accounting for 40.9% of the flows, followed by financial intermediaries and households⁴.

Although UK asset managers have identified unmissable fundraising opportunities in Europe, Brexit has meant that firms face new obstacles when distributing their products into the EU. While the UK recently confirmed that EU UCITS are equivalent under the Overseas Funds Regime and can distribute freely using the Temporary Marketing Permissions Regime, the EU is yet to reciprocate.

Alessandro Cavallari, Head of International Sales at SGSS highlighted:

Brexit means that UK managers cannot avail themselves to the EU marketing passport anymore, but they can distribute into the EU either by using the National Private Placement Regime (NPPR), or through establishing an onshore presence, typically in Luxembourg or Ireland, two of the leading European onshore fund hubs which between them are the domicile of choice for 45% of the European funds industry

However, cross-border fund distribution is not always a frictionless process for non-EU managers.

Take the NPPR, which enables third-country managers to market funds into EU member states where they have registered with the local regulator.  Managers often find that different member states will have their own rules covering registration, reporting and the appointment of local agents, creating additional costs and barriers at a time when margins are already under considerable pressure.

Unlike Regulations that are harmonised across the 27-member state bloc, EU Directives give individual countries a degree of flexibility in terms of how they implement the rules, which can occasionally lead to divergences emerging inside the EU. This fragmentation has been known to cause all sorts of compliance headaches for non-EU managers when distributing funds ‘cross-border’.

An all-round service provider is key

As more UK-based asset managers move further down the illiquidity spectrum and simultaneously try to boost fundraising in the EU, they need to appoint a service provider who can help them meet these goals and support their broad, and sometimes niche, requirements.

Davis said:

To facilitate seamless cross-border distribution, SGSS - through its Centres of Excellence in Luxembourg and Ireland - can support UK and global asset managers when distributing their funds  in the EU.

Davis continued:

Our local experts, who have extensive experience in the funds industry, can help asset managers navigate the various market entry, regulatory and compliance requirements inside the EU, thereby enabling them to access the market as efficiently as possible. In addition to its sizeable European contingent, SGSS also retains a local presence in the UK, which ensures UK clients domiciling and distributing funds in the EU are well-served from their home market.

At the same time, and on top of more classic strategies, SGSS is in an excellent position to support managers running private market strategies – including private equity, private credit, real estate and infrastructure – through its specialised asset servicing division.

A well-rounded service provider is a critical partner given the changes and diversification happening in the funds industry. With more asset managers looking to rationalise costs and simplify operations, by streamlining the number of third-party relationships and counterparties they maintain, ‘one-stop’ service providers stand to be among the biggest beneficiaries.

Cavallari noted:

Providers, which have strong balance sheets, adopt cutting-edge technology, support multiple asset classes and offer a wide range of flexible solutions and reporting to support their clients’ ever-changing needs, will win more market share moving forward.