Agefi Luxembourg - février 2025

AGEFI Luxembourg 22 Février 2025 Fonds d’investissement O ver the past few years, the alternative asset manage- ment industry has under- gone profound changes driven by consolidation and increasing fee pressure from global institutional Limited Partners (LPs). These trends are reshaping the competitive landscape and forcing pri- vate equity firms nota- bly to rethink their strategies. How can alternative asset ma- nagers adapt to these challenges and remain relevant in a rapidly evolving market? Continuous consolidation and fee pressure on the alternative industry One major consequence of these shifts is the con- solidation of alternative asset managers (AAMs) into global platforms, along with the persistent pressure onmanagement fees. These dynamics are redefining industry structures and compelling firms to explore new operational models to main- tain competitiveness. Consolidation of alternative asset managers This consolidation trend among AAMs is driven by the need for economies of scale, diversification of product offerings, and enhanced operational ef- ficiencies amid a globalizing industry. Larger firms are acquiring smaller ones to expand their geo- graphic reach, diversify their investment portfolios, and leverage synergies. Additionally, the race to grow assets under management (AuM) has inten- sified, fueled by the listing of many asset manage- ment companies. Publicly tradedAAMs seek to attract more institu- tional capital, enhance market visibility, and in- crease valuation, further accelerating industry consolidation. This dynamic allows AAMs to bet- ter compete in a crowded market and meet the growing demands of leading institutional in- vestors, such as insurance companies, pension funds, and sovereign wealth funds. Let’s give few examples: in August 2024, T. Rowe Price announced the acquisition of OakHill Advi- sors, a leading alternative creditmanager, to diver- sify its investment strategies. In January 2025, Apollo announced that it has en- tered into an agreement to acquireArgo Infrastruc- ture Partners, a mid-market asset manager targeting essential infrastructure assets in North America, in a stock and cash transaction. At clos- ing, Argo will add approximately $6 billion of as- sets to the Apollo infrastructure platform, as well as an experienced teamofmore than 20 profession- als focused on core and core plus infrastructure eq- uity opportunities. Similarly, in August 2024, Axa Investment Man- agers completed the acquisition of Capza, a Euro- peanprivate equityfirmspecializing inmid-market investments. This acquisition was part of Axa’s strategy to enhance its position in the alternative in- vestmentsmarket inEurope. Capza, which focuses on investing in mid-sized companies across Eu- rope, theMiddle East, andAfrica, will contribute to Axa’s expanding private equity capabilities. Previ- ously, Axa IM had acquired a majority stake in Capza in 2022, and this full acquisitionmarks a key step in Axa’s broader strategy to strengthen its al- ternative investment platform, particularly in lever- aged buyouts (LBOs) and direct lending. Fee pressure and shiftingmodels Fee pressure is another significant factor reshaping the industry. This pressure is forcing somemiddle- sizedAAMs to rethink their fee structures, moving frommodels basedon commitments to those based onAuM. The goal is to align feesmore closelywith performance and value delivered to LPs. This shift is also driven by the increasing competi- tion among AAMs, as they strive to differentiate themselves and attract capital in a market where large institutional investors havemore options than ever before. But shifting fromcommitment toAuM is not an easy exercise as it requires deploying com- mitment rapidly with a diversity of products and jurisdictions, to compensate for the loss of income (i.e., two to three folds lower on AuM vs. commit- ment over the fund lifetime) in an industry having cost base mostly of fixed nature. According to a recent survey conducted by Pre- qin(1) the average management fee rates on AuM for 2024 vintages and fundraising appear to be more advantageous for LPs, standing at 1.74% for buyout and 1.93% for growth capital, compared to 1.85% and 1.97%, respectively, in 2023. This trend in feedevelopment signifies adecline for the second consecutive year. Based on this Preqin analysis, with fundraising pressures anticipated to persist through 2026, average buyout feesmay continue to decrease over the next two years. Influence of Limited Partners and regulatory pressures The pressure on fees and the need for consolidation are not justmarket-driven; they are also influenced by regulatory bodies. LPs are pushing for cost reductions and more effi- cient operations. Theywant their investments to be managed cost effectively, with a focus on regular distributions that maximize returns. For instance, in the current environment, where margins are being squeezed, LPs are demanding greater value for their money. Additionally, regulatory bodies, such as the SEC in the U.S. and the CSSF in Luxembourg, are impos- ing stricter controls, particularly in scrutinizing fees, to mitigate risks and prevent systemic failures. These regulations require LPs andAAMs to adopt more robust risk management practices and en- hance their operational resilience and reporting ca- pabilities. AAMs thus face the dual challenge of managing their own growing regulatory burden while also addressing the regulatory demands of their LPs, who frequently lack the resources tohan- dle the increased reporting requirements and com- plexity of their alternative asset portfolios. For instance, regulations suchas theDigitalOperational Resilience Act (DORA), ESG or ATAD 3 in Europe have introduced new compliance requirements that AAMs must navigate. Technological investment and operational efficiency AAMs thereforemust invest in technology andop- erational infrastructure to enhance their reliability, efficiency, timeliness of reporting and scalability. This includes adopting advanced data analytics, automation, and digital tools that can streamline processes and improve decision-making. By lever- aging technology, AAMs can gain a competitive edge and increase their strategic value before going public, or before being acquired by a bigger player, looking for a plug-and-play integration. Operations are a key component of success An operating model in the alternative investment industry refers to a framework that outlines howan investment firmmanages its portfolio companies to createvalue andachieve investment objectives. This model typically includes key components such as governance structure, performance metrics, opera- tional expertise, and financial management. In our context, the operating model primarily fo- cuses on delivering accurate financial reporting, es- pecially in the back office, rather than front-office operations. It is designed to operate efficiently and quickly,managing costs effectively toprovidevalue toLPs. This approachensures that portfolio compa- nies aremanagedeffectively toachieve strongfinan- cial outcomes and generate value for the shareholders ofAssetManagement Firms (AAMs). Operations in the alternative industry are not just about understanding the business; they also require the ability to provide quicker, insightful and cost- effective reporting to the investors. By leveraging deep market knowledge and data-driven insights, the first movers can gain a competitive edge and make informed decisions that positively impact their portfolio’s performance. Measuring and communicating gains Any gains achieved through transformationmust be measurable and adequately communicated. Demonstrating the ability to implement successful transformations that align with market require- ments is essential for building LPs and shareholders’ confidence and securing future LPs’ investments. This in- volves setting clear performance metrics, tracking progress, and providing regular updates to stakeholders to ensure trans- parency and foster trust. Efficiency gains of 20% to 30% canbeachievedandsignificantly impact the return on invest- ment on the portfolio. How- ever, these gains are only feasible and sustainable if the right amount of time, skills, and priorities are clearly defined upfront. It is crucial for AAMs to ensure thatmilestones and specific goals are outlined as part of their strategy, enabling clear tracking and assessment of progress. The importance of a clear strategy Awell-defined strategywith concretemilestones is essential for a successful transformation. AAMs must integrate operations and talent into their long- termvisionwhile ensuring that all stakeholders are aligned. To achieve this, they need to set clear pri- orities, provide structured guidance, andmaintain consistent communication. Collaboration between the front office and opera- tions teams ensures that the transformation efforts remain strategically relevant and effectively exe- cuted. By fostering cross-functional cooperation andmaintaining transparency,AAMs candrive ef- ficiency and address stakeholders’ needs in a timely manner. What reallymatters to transform your operatingmodel? Transforming the operatingmodel is crucial to be- coming an attractive acquisition target and/or be- coming a market leader. A well-executed transformation canderiskoperations, enhance scal- ability, improve efficiency, and create significant savings. These changes also lead tomeasurable im- provements inmargins, portfolioperformance, and fund returns, without forgetting the profitability of theAAMs themselves. To achieve successful integration, AAMs must focus on several key factors. Optimizing processes, technologies, and talent is vital for achieving scalability and operational effi- ciency. This involves streamlining workflows, adopting best practices, and leveraging technology to automate routine tasks. For example, implement- ing a robust cashmanagement systemcan provide real-time insights into investment performance and facilitate data-driven decision-making. These tools helpAAMs not only stay ahead of competition but also enhance the accuracy of their operations. Integrated solutions across the investment life cycle: a successful transformation also requires an inte- grated solution throughout the entire life cycle of a fundand its investments. This necessitates expertise across several domains, such as regulatory compli- ance, finance, and reporting.However, such expert- isewill only be effective if proper coordination and governance are inplace to ensure seamless integra- tion and execution. Data plays a pivotal role in the transformation process. Properlymanaged and structured data en- ablesAAMs to providemeaningful and centralized information within a secure environment. This al- lows for better forecasting and ensures that AAMs areresponsivetomarketdemandsandexpectations. Whendata ishandledeffectively, it builds trustwith management, LPs, and regulators, making it easier to adapt to future trends and requirements. Partnering for transformation Whether insourced, co-sourced, or outsourced, se- curing the right support is crucial for defining a rel- evant, adaptable, and sustainable operatingmodel. Choosing the right partner to advise, implement, or provide services is essential for a successful transformation. The ideal partner should not only have deep credentials but also demonstrate their ability to implement similar transformationswithin their own organization. For instance, a global private equity firm specializ- ing in buyouts of mid-market companies encoun- tered significant challenges related to the complexityof its processes anddataflows. Thefirm was constrained by legacy systems, which limited flexibility, integration, and scalability.Additionally, the complexity of data integrationwas exacerbated by the diverse sources from various departments and the multitude of applications in use. Regula- tory constraints and limited resources further com- plicatedmatters. As a trusted partnerwith a proven track record, we were able to assist this firm by identifying and im- plementing proven technology solutions. We also led theprojectmanagement efforts toachievemeas- urablebenefits. The examinationof current financial processes and data workflows identified bottle- necks and redundancies, which were addressed through the implementationof targeted technology enhancements. This project was managed by expe- riencedprofessionals adept at handlingcomplex ini- tiatives without disrupting ongoing operations. Initially seen as a cost center, the operations were transformed througha successful cashmanagement strategy that ultimately generated income to fund the transformation.As a result, thefirmsawa reduc- tion incostsby10%to20%, alongwithenhancedse- curity and an increase in investor confidence. In closing, the consolidation of AAMs and the in- creasing pressure on fees are driving significant changeswithintheindustry.Tosucceedinthisevolv- ing landscape,AAMsmust embrace transformation byoptimizingtheiroperationsthroughintegratedso- lutionsthatplacedataatthecore.Bydefiningarobust strategy in advance and collaborating with experi- enced partners, AAMs can enhance their appeal to larger firms, improve operational efficiency, andde- liver greater value to their investors. Laurent CAPOLAGHI, Partner, Private Equity Leader Aurélie COMPTOUR, Partner, Accounting Compliance and Reporting EY Luxembourg 1 )https://lc.cx/c72tYZ Transformation: AMatter of Survival forAlternativeAsset Managers A new sustainability certification, ESG 1000, has been launched to help businesses of all sizes sim- plify their sustainability reporting. Deve- loped by the International Group for Sustainable Finance (IGSF), a Luxem- bourg-based independent standards body, ESG 1000 provides a structured ap- proach for companies to align with global sustainability principles. By integrating major international standards— such as GRI, ESRS, ISO 26000, and the UNGlobal Compact—the certification creates a common fra- mework tomeasure and report non-financial per- formance. This helps businesses cut through com- plex regulations and communicate their sustai- nability efforts more clearly. IGSF, which has previously developed certifica- tions like MSI 20000 andAML 30000, aims to roll out ESG 1000 in over 50 countries within five years. “ESG 1000 provides a robust framework for aligning economic performance with ethical and environmental practices,” said IGSF President Véronique de la Bachelerie. With global sustainability reporting becoming increasingly complex, ESG 1000 offers companies a clear and structured way to demonstrate their commitment to responsible business practices. Source: LuxembourgforFinance ESG 1000: Luxembourg’s New Sustainability Certification Standard ©shutterstock