BCG predicts revenue boom from real estate, hedge funds
Revenue from alternative assets such as private equity, hedge funds, and real estate assets will grow to more than half of the global revenue in the next five years, according to a new report by Boston Consulting Group (BCG), a leading global management consulting firm.
This is according to the 20th edition of BCG’s annual study of the assets industry titled Global Asset Management 2022: From Tailwinds to Turbulence.
Emerging trends that are expected to shape the future include an increasing shift of portfolios into alternative assets in the pursuit of higher returns compared to publicly-traded markets.
Alternative products represented more than 40% of total asset management revenue in 2021, despite comprising less than 20% of global AuM. This trend is expected to continue over the next five years, with revenue from alternatives forecast to grow to more than half of all global revenues in the industry by 2026.
“Over the next five years, we expect the revenue from alternatives to grow to more than half of all global revenues, thanks in large part to the fees that alternative assets command,” the report stated.
Moreover, with $100 trillion to $150 trillion in capital deployment required to reach net-zero goals by 2050, demand for sustainable investments represents an opportunity that will dominate the sector in both the short and long term. Roughly $20 trillion to $30 trillion is expected in bond and equity allocations for asset managers, much of it frontloaded over the next few years as more investments flow into climate-transition projects.
Stefano Niavas, Partner and Managing Director in BCG Nigeria, said, “Africa’s economy continues to be attractive to private capital investors who are seeking huge returns and Nigeria tops the list of countries that had remarkable private capital inflow in 2021. A larger share of these funds was invested into venture capital assets followed by infrastructure and then private equity. About 145 Venture Capital deals were reported in Nigeria in 2021, with a total value of $1.1 billion, according to African Private Equity & Venture Capital Association (AVCA).
“This is a wake-up call to assets fund managers to take advantage of this trend and position themselves for an early win in this dynamic asset management industry as alternative products promise better performance.”
New technologies such as direct indexing are putting the core value proposition of asset managers at risk of disintermediation by simplifying the manufacturing and packaging process—which enables new participants to enter the market and build personalized products that they can take directly to their clients. This is especially the case for wealth managers, leading to growing convergence between the asset- and wealth-management industries, which are both beginning to chase the same asset pools.
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The asset management industry continued its unprecedented growth trajectory in 2021, with global assets under management (AuM) rising by 12% to $112 trillion, significantly above the 20-year growth average of 7%.
Strong performance in equity markets has been the key driver, representing 90% of revenue growth between 2005 and 2021. During the same period, revenues from net flows have been largely offset by investors shifting their asset-class mix toward lower-priced products and by ongoing fee pressure. Yet despite rising costs, operating profit margin rose to a healthy 38% in 2021, up from 36% a year earlier, as average AuM growth outpaced the increase in costs.
“The incredible market run that has fuelled the performance of the asset management industry over the past 15-plus years has been a double-edged sword,” said Chris McIntyre, a BCG managing director and partner, who co-authored the report. “On the one hand, it has provided strong tailwinds for the sector, but it has also challenged innovation, allowing the market to be dominated by legacy products that benefit from the compounding effect of returns on underlying assets. There are signs that these trends are beginning to shift, and the ensuing turbulence is an opportunity as well as a challenge for industry players.”
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