11 Jun What is the future of asset management post-coronavirus?
In the asset management sector, we’ve benefited from a time of increased prices that pushed equities higher. The unprecedentedly cheap debt caused an explosion in borrowing to leverage expansions across myriad economies and industries. Then came COVID-19.
It’s difficult to absorb and assimilate the changes we’ve seen over the last few weeks. However, there are many reasons to be optimistic about asset management recovering. The action we take now as asset management firms will ensure the industry as a whole can recover when the time is right.
Immediate impact of coronavirus on the future of asset management
Since the end of February 2020, private equity investors have been shoring up businesses that once appeared rock solid. When huge expanses of the economy are effectively stopped almost overnight, many business sectors are facing possible ruin. Private equity funds are working to manage in the short-term as a form of crisis management.
Available capital must be directed to where it will do the most good. And of course, this means far fewer new deals. This is exacerbated by the general business disruption and economic uncertainty caused around the world by the pandemic.
Hopefully, enough money will remain to ensure most businesses will get through this crisis. And there are opportunities for investors and private equity, whether that means partnering with government agencies or working with private industry. We’re already seeing various activity, including secured and unsecured financing, bridging finance. The unprecedented situation has presented significant opportunity to invest profitably while ensuring some stability.
It’s likely that businesses will need refinancing options, and we can expect to see risk averse investors taking a sharp exit. This will present yet more opportunities for investors banking on a fast recovery once the worst is over, and this makes for extremely attractive investment options.
How asset pricing will need to evolve
Asset pricing will need to evolve into the future to mitigate against another similar- or worse – crisis. The Spanish flu influenza pandemic in 1918 came back with a vengeance after initially dying down. Could COVID-19 do the same? It will be interesting to see how markets evolve around this kind of global emergency.
It appears that few in the asset management industry factored in a global pandemic to their risk strategies. There is also the impact of mass working from home, which could be long tail and profoundly alter the way people work. There is no doubt that the immediate impact of the pandemic is difficult to navigate, but with the right kind of exit strategy, governments around the world should be able to lift economies back into some kind of normality.
For us in the investment and asset management sector, it’s about working out the best timing for key decisions. We need to be ready to take advantage of the opportunities that the new normal will present.
Abrax Merger Arbitrage returns +10,5% in April
What are the biggest concerns for the asset management industry?
According to PWC, the biggest concerns for asset management are:
- The financial impact of the pandemic on capital resources, liquidity, operations and future periods, which stood at 71% on 22 April 2020.
- The possibility of a global recession (on 22 April 2020, 64% cited this as their biggest concern.
- The effects on our workforce/reduction in productivity (on 22 April 2020, 41% marked this as a major concern).
Asset and wealth management businesses will have business continuity plans in place. However, these are unlikely to be flexible of fast-moving enough to deal with the unknown variables of a global pandemic. Contingency plans don’t generally include the assumption that billions of people will be under quarantine. When we add in the travel restrictions, lack of medical supplies, soaring deaths in certain countries and general confusion, it’s likely these continuity plans don’t go far enough.
The pandemic is presenting the asset management and wealth management industry with significant challenges. These have, by default, become the trends that will impact asset management throughout 2020 and into next year.
Asset management closely linked to economy
The asset management sector can be looked at as a general indicator of the overall economy, due to the proximity of revenues with capital markets. Since the market highs in February 2020, publicly traded asset managers have experienced decreases in their share prices of between 20% and 30%, and sometimes more.
There are signs of stress for large parts of fixed income markets, including corporate credit. At AUM Asset Management, we know that there will be significant volatility for the markets over the coming months. We don’t know exactly how this will play out but there is no doubt that it’s challenging times for investors.
With business continuity plans unlikely to cover all the bases needed (this would include breaking points for technology, third-party risk factors, financial reporting, operations and net asset value calculation among others), asset management firms may discover they don’t have enough information into the plans of their supply chain. Asset managers rely on a long list of service providers, and each of these must also be able to weather the coronavirus storm.
Cybersecurity is also an increased risk. This is always one of the top priorities for asset managers, but there may not be extra vulnerabilities that could give even higher levels of access to core systems. How asset management as a sector responds to this crisis will shape its future beyond the pandemic. And how a company responds will also impact public, client and employee attitudes.
For now, it’s about watching the markets and judging when to take decisions. Many countries (for example, China, Spain and South Korea) are re opening their economies. Over the next few weeks, we’ll be in a better position to review the true impact of coronavirus on asset management, and how this will affect the industry into the future.
