The asset management industry in 2023 faces numerous complex challenges, from regulatory scrutiny to intense deal competition and high operational costs. And that’s in addition to geopolitical tension, the threat of recession, and rising interest rates.
All these issues place considerable weight on asset managers’ figurative shoulders as they navigate how to best fundraise and manage investments in an evolving and difficult environment.
What is the asset management industry doing about these challenges?
The leading fund management companies are focusing on transformative legal technology. The right asset management software can digitally transform routine business and legal processes, which can result in streamlined workflows, less reliance on outside counsel, and lower operational expenses.
Driven by the need for a digital transformation in fund management, Ontra launched the legal operating system (legal OS) for private markets, which features purpose-built functionality based on direct feedback from our customers.
Top 4 asset management challenges of 2023
The private markets and asset managers have grown tremendously in the past decade, reaching $9.8 trillion assets under management (AUM) and almost $1.2 trillion in fundraising in 2021. Firms have greater AUM across more fund types and regions than ever before. When once firms specialized in a single strategy, now they play multiple strategies across the globe.
With this growth comes myriad challenges: greater competition, increased regulatory scrutiny, compounding business complexity, and ballooning costs.
1. Rising deal competition
Despite rising AUM and increasing liquidity, fund managers don’t necessarily see a greater number of advantageous deals. Instead, there are more funds fighting for the best opportunities. The number of private equity funds increased by approximately 60% between 2016 and 2021. Now more than 18,000 private equity funds are registered with the SEC.
Such significant competition has compressed diligence timelines and forced managers to review more opportunities to reach a single closed deal. Ultimately, firms are finding ways to move faster and differentiate themselves to win over their targets.
2. Increasing regulatory scrutiny
The U.S. Securities and Exchange Commission (SEC) spent the last few years taking a closer and closer look at how asset managers operate in the private markets. Historically, the private markets had far less regulatory oversight than public markets. That’s beginning to change as the SEC proposes and issues new regulations impacting private fund managers and increasing enforcement actions against registered investment advisers.
The SEC filed 760 enforcement actions in the fiscal year 2022 — a 9% increase over the prior year — and is looking into everything from conflicts of interest to fees and expenses, side letters, and valuations.
3. Growing business complexity
The processes required for raising and managing a fund have fundamentally changed and become more complex in the past decade. Investors are demanding side letters more often, increasing the challenges associated with contract management and compliance. Ten years ago, some investors within a fund might need a few unique terms set out in a side letter. Now, however, sometimes every investor has a side letter, and the average number of terms increased more than 10x to 32 after 2014.
Differing and evolving regulations around the world add another layer of complexity. Asset managers working with investors in numerous jurisdictions have to understand and comply with overlapping regulations and, in some nations like the U.S., increased enforcement action. The patchwork of rules and the potential for noncompliance are top risks for asset managers.
4. Increasing operational expenses
Increasing deal competition, regulatory scrutiny, and business complexity all contribute to rising costs. Some firms have managed to keep operational expenses level or rising slowly despite scaling. Others continue to struggle with ballooning costs due to their lack of efficient processes and overreliance on expensive outside counsel.
Solving asset management challenges with the Legal OS
Despite economic headwinds, many asset managers are optimistic about fundraising and dealmaking this year. They know it’ll take new approaches and technologies to reach their goals, though.
Asset managers need faster investor onboarding processes through electronic subscription documents. They need faster non-disclosure agreements to dive into due diligence sooner. And they need a better contract management solution that offers immediate access to structured LPA and side letter data to improve regulatory and contract compliance. Ontra’s legal OS offers all of these benefits and more.
Ontra is an alternative legal services provider in the United States. We are not a law firm and do not provide any legal services, legal advice, or referral services. We do not provide any legal representation to clients, nor do we participate in any legal representation of clients. The contents of this article are for informational purposes only. For assistance, please consult your legal advisers.