ESG & Alternative Assets – Impact on Wealth Management Investment Strategy
Changing Business Environment
Economic headwinds in the US, UK, and EU – high interest rates and liquidity tightening – have impacted the wealth management (WM) industry. After years of sustained growth, global AUM saw its first decline (10%) in 2022, driven by falling markets. New business flows, and average Client Business Volumes (CBV) also declined in 2022.
This decline coincides with a surge in US investor preference for passive investments, further eroding the fee-based income. WM firms are eyeing diversification into new offerings with better margins to counter shrinking growth and profitability. This strategy aligns with evolving customer demand for newer asset classes, such as ESG-compliant investing and alternative assets.
Diversification Into New Asset Classes
- ESG-Compliant Investment: Driven by rising social consciousness and the potential for regulatory risks with non-compliant businesses, Environmental, Social, and Governance (ESG) compliant investing is emerging asn a key priority for investors. Significant advances in energy transition to clean energy sources have also opened new avenues for profitable investment.
Research reports indicate that institutional investors plan to significantly increase their ESG holdings, with global ESG investing set to exceed US $53 trillion by 2025. Two-thirds of HNW investors consider ESG scores before making investment decisions. require specialized platforms for launching ESG related products & offerings and keeping track of ESG investments. They also need to acquire capabilities for ESG investment opportunities related data collection, analysis, identifying investment opportunities, risk measurement & tracking in terms of ESG performance, and regulatory & client reporting.
- Alternative Assets: assets like Private Equity, Private Credit, Private Real Estate, and Digital assets like Cryptocurrencies, NFTs, and Tokenized Passion assets (Art, Wine, Nature) etc. - are emerging as a preferred investment option to Ultra High Net worth & High Net Worth investors seeking diversification. While carrying high risks, they provide significantly higher returns for investors with deep pockets & a higher risk appetite. Globally, alternative assets now account for over a fifth of total AUM, contributing half of the industry's revenues.
Within Alternative Assets, Private equity has been popular following the recent liquidity-driven repricing and valuation corrections. While digital assets like cryptocurrencies remain volatile, interest in safer tokenized real-world assets (RWAs) is growing.
Alternative assets are inherently complex—liquidity, regulation, and pricing create unique challenges for WM firms. They'll need specialized advisor talent and the technological infrastructure to manage this asset class and address client expectations effectively.
Acquiring ESG & Alternate Assets Investing Capabilities
While diversification into these new asset classes through organic growth is an option, considering the specialized talent and technology platforms required to advise on & manage these asset classes, and time to market, WMs are looking at Mergers & Acquisitions (M&A) as a serious alternative. Both in the US & Europe there is increasing interest in acquiring additional capabilities, customers & markets through M&A. M&A activity surged in 2021-2022 in both the US and Europe as firms targeted the capabilities, clients, and markets to accelerate their diversification.
Some Examples include:
investment capabilities presents an opportunity to WM firms to grow their business & also avenues for increasing fee income.
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