By Mike Greenstein, PwC US Alternative Asset Management Leader –
As I reflect on 2016 and think about 2017, the key word is… change.
There is certainly a lot of change going on. Change occurring in the political environment. Change expected in regulation, tax, and legislative agendas. Closer to the alternatives industry, change in performance expectations, change in the alignment of interests that have long served the industry, and change in digital business transformation. Change seems to be happening faster, is less predictable, and is a lot more complex than ever.
But, as they say, with change comes opportunity. So, I wanted to take this opportunity to share some fresh thinking on change.
Change as a business imperative: It’s no longer enough to manage or react to change. The fresh thinking is that we need to embrace change and do it quickly. We need to anticipate it, prepare for it, and even spark it. Said simply, change is the new business imperative. I used to say that we are a “just-in-time” industry, reacting to change by addressing new requirements just as they were needed. With uncertainty as to the timing and magnitude of change, especially on the tax front, perhaps we need to shift to a more proactive “just-in-case” approach by anticipating change and introducing more scenario planning. The view that whatever happens we can just figure out and deal with is outdated thinking. The fresh thinking is that we need to shape our destiny armed with data, analysis, and planning.
Transforming fund accounting to fund finance: As firms continue to industrialize their infrastructure, there is an opportunity for fresh thinking as the fund accounting function transforms into more of a fund finance function. Of course, fund accounting teams should spend time on financial accounting and reporting, but they should spend an increasing amount of their time on financial planning and analysis.We also see firms look to sourcing strategies like third-party administrators and business process outsourcing firms to create variable costing models. At the same time, competing market dynamics are fostering fresh thinking around how firms manage their fund administrator. While conventional thinking currently supports a full shadow model, fresh thinking points to a more economically sustainable, risk-based or “smart shadow” model going forward. Under this model, fund finance teams focus less on doing and more on reviewing. To achieve this transformation, capital investment will be required, both in terms of financial capital and human capital.
Human capital under management: Beyond the ongoing technology investments, alternative managers continue to make investments in human capital. And the battle for talent will continue to intensify. Anticipating talent shortages in key areas, alternative firms are making recruiting, retaining, and developing talent a priority. With relatively lean human capital functions, alternative managers are thinking about the new skills they need and the best ways to manage and develop a growing and young work force. On the non-investing side of the business in particular, firms are introducing fresh thinking around training, leadership development, communication, and mobility. The skills required today from an operations and accounting professional could be very different from those required in the future. Managers who invest in learning and development programs to cultivate these skills will be in the best position to take advantage of future opportunities.
Introducing the tax front, middle and back offices: Increasingly, the role and needs of the tax function have evolved to support the growing needs of alternative firms spanning the front, middle, and back offices in a more integrated manner. We are seeing more deal-related tax professionals focus on front office transactional planning, including assessing the impact of potential tax reform and proactively engaging with portfolio companies to mitigate tax risk or optimize tax planning. After an investment is made, the tax middle office will capture and track key attributes around deal and investment structures to facilitate tax analysis, planning, compliance, and forecasting. The tax back-office then takes over with the right people, processes, and technology to accomplish the growing complexity and volume around tax analysis and tax compliance reporting.
Multi-asset class investing is here to stay: The truth is, we operate in an integrated, multi-asset class investing world. That’s how many investors see it. That’s the way investors think about asset allocation and risk, and that’s the way the regulators and tax authorities see it too. We all are part of a broader asset management industry, an industry that is changing rapidly in terms of its size, its role, and its importance. While many managers focus on a specific segment, the trends, opportunities, and challenges that we see are more similar than they are dissimilar. Alternative managers are increasingly spanning both public markets and private markets in the search for alpha. They are leveraging the tools, the terms, and the talent from other segments of the industry. And many alternative managers are broadening asset classes, expanding product offerings, and accessing new distribution channels. Many are on a similar journey with respect to transparency and transformation.
The fresh thinking I leave you with today is that you can’t fully understand the competitive environment if you don’t understand these broader dynamics.