In their recent 2023 North American asset management report, “Everything everywhere all at once,” McKinsey provides some frank assessments of the industry while also highlighting structural adjustments leading to likely once-in-a-generation opportunities in four areas:
I. Dash for cash—With short rates at 4-5 percent, the adage “cash is trash” simply does not apply in the current market environment. And in fact, there were record inflows of more than $600 billion into money market funds in the first half of 2023 alone. Besides the inflows, money market funds have once again become a profit source for money managers as they have been able to remove their fee waivers placed on money market funds when they yielded practically zero—McKinsey reports the revenue pool for money market funds in the United States more than doubled over the first eight months of 2023 to about $13 billion. Also it is worth mentioning that it can be lucrative for a firm to have the cash balances under the firm’s umbrella for possible deployment into other firm investment strategies when moved out of cash.
II. A new future for fixed income—Higher interest rates have renewed fixed income investing in several interesting ways. For many years, fixed income has been considered the “diversifier” that allowed investors to hold higher return higher risk assets such as equities. This approach is now dated with fixed income being relevant on its own merits. Demographic trends of retirement of baby boomers combined with higher return profiles are contributing to many innovations, particularly in breadth and depth of fixed income ETF wrappers for execution efficiencies, and private credit continuing to evolve and increase in importance. On private credit, McKinsey provides a couple of illustrative statistics—the share of leveraged buyout transactions financed by private credit increased from about 60 percent in 2019 to about 80 percent in 2022. And private lenders have also started to attract larger borrowers, at the expense of intermediaries like banks, with the number of direct lending deals of $1 billion or more totaling about $70 billion in 2022, up from about $5 billion in 2019.
III. An evolution in private markets—the growth of alternative investing has been one of the most important trends in reshaping the asset management industry over the past 25 years. What is new is there has been a downturn in fundraising the last couple of years, largely due to market conditions including the IPO environment, though fundraising in both 2022 and 2023 still booked at over $1 trillion. See chart above. Whereas historically the funding for alternative investments was from the institutional sector, the bulk of money flowing into private markets currently is from individuals, including HNW and retail—and there a great focus by many firms to educate investment advisors and capture individual inflows for this area of future increasing growth.
IV. A reset in real estate—McKinsey estimates a potential $5 trillion money-in-motion opportunity over the next five years, as significant pools of real estate assets migrate to third-party investment management. Contributing factors include office property valuations down over 20 percent and over $1.2 trillion of commercial mortgages due the next couple of years. The real estate sector is primed for capital markets activity to re-bundle assets and redistribute risk.
Some concluding thoughts – Previously I have written about many opportunities and challenges in our asset management industry. The McKinsey report provides an excellent overview of the industry, highlighting the four opportunities above. I would particularly emphasis the private markets opportunities, both in terms of asset sectors and distribution channels. Finally, as the asset management industry continues to mature and increase in complexity, firms are increasingly bifurcating into “the winners” and “the nots”—as well as addressing the obvious technology, operations and platform imperatives, the winning firms continue to lead with performance in evolving assets classes and scale.