Why the rise in Alternatives demand from Institutional investors?

In light of an increased focus on balance sheet risk and the need for tangible investment returns, alternatives as an asset class has once again rotated into prime focus. Genuine ‘alpha’ creation, although not precisely defined, has become the key priority for most Institutional investors. Dusting themselves down admirably from the crisis, and with some vital legislation enacted to govern transparency and perceived risk¹ Hedge Fund providers, Private Equity Firms and Real Estate players have once again become a more than credible source of returns. Allocations to illiquid credit by pension funds doubled to 8% in 2016 and current AUM from Global Alternatives stands at a staggering $6.5 trillion, having grown at a 5 year rate of over seven times that of traditional asset classes².

What sub-classes of Alternatives are currently interesting investors?

As with any demand, rotation of asset allocations and changing macro-economic conditions mean this is a frequently changing area. However current demand suggests the following are of increasing importance:

• Infrastructure/Real Estate Debt
• Direct Corporate Lending
• Private Equity
• Real Estate
• Infrastructure Equity
• Hedge Funds

How are Asset Managers seeking to capitalise on this demand?

Of course, having a strong performing product or strategies is vital for any growth. However, many mainstream managers are under pressure, particularly from retail investors, to clarify both investment process and product strategy. Additionally, a lack of track record³ and credibility provide added headwind for winning business. Faced with these challenges, the response to date has broadly been twofold:

• Purchasing a boutique or team lift out
• Strategic partnerships with niche alternatives managers

The former has provided far more evidence of failure than success as cultural issues and internal conflicts have jeopardised long term integration. The latter circumvents this to a degree, with managers able to ‘stress test’ cultural and strategic fit. However, without an option to purchase either part of or the entire boutique dependent on success, managers can end up serving as a very lucrative distribution arm for the boutique with little in return.

For those wishing to grow capabilities organically, what are the primary challenges? Our feedback suggests that the two biggest factors⁴ challenging traditional asset managers and their diversification into alternatives are:

i) Risk Management – Dedicated frameworks, Personnel and experience in this area.

ii) Technical Product Expertise of the Sales force

A Significant Increase in Demand for Quality Alternative Sales Specialists:

As firms have grown their Alternatives capabilities and strategy range, we have seen significant interest from clients across the board for high quality, technically astute ‘Alternative Sales Specialists’. The way these units operate broadly fall into 2 approaches:

i) As commercial Product Specialists working alongside and in conjunction the generalist sales teams.

ii) Directly accountable salespeople with their own P&L.

Articulating alternative strategies and investment methods to clients arguably presents a greater challenge than traditional products. The increased complexity of strategies and depth of consultant and client investigation has meant some firms have sought to bolster their client portfolio or product specialist teams with highly investment literate talent (often ex investors). Such individuals are often used in a quasi-sales role.

Other players have sought new talent from less traditional sources, again including Hedge Funds and Investment Banks. However, this strategy is not without challenges. Cultural assimilation and suitability to the buy side are critical.

Equally individuals often have to adapt to a decrease in geographical responsibility, given many Alternatives managers run a very lean but geographically diverse sales team with salespeople often holding a ‘fly in fly out’ pan European role. Despite the recent pressure on sell side compensation bringing levels closer to the buy side, sales professionals in both Hedge Funds and Investment Banks are often used to formulaic and potentially lucrative remuneration schemes which reward success but are also a product of the higher revenues achievable within the asset class. For many traditional managers, a consideration of a separate compensation structure is needed, although this can present obvious organisational problems where the alternatives specialists are part of a larger distribution effort.

Some have chosen to respond by revamping sales training, education and product communication (marketing information etc.) to bridge this perceived shortfall. In our experience, this needs to happen in conjunction with a conscious upgrading of available sales talent. One trend that has emerged, is a genuine requirement for sales professionals across both traditional and alternatives strategies to approach new prospective clients in a measured and consultative manner rather than being a focused, ‘product pusher’ which can be the perception particularly with higher margin products (i.e. alternatives). Individuals who possess both the technical expertise and emotional EQ to achieve this are highly sought after.

Key Characteristics of Successful Candidates:

During several recent Searches, we have observed the following shared characteristics of successful Alternative Sales Specialists:

• Excellent work rate and sales drive.
• Real depth of product knowledge in one or more Alternative sub categories (PD, PE, RE, HF etc.)
• Ability to be utilised with clients in place of Portfolio Managers on occasion.
• Wider appreciation of a client’s Asset Allocation decisions and how Alternatives can be incorporated.
• Consultative sales manner focused on outcome orientated solutions.
• Multi lingual ability is preferred given pan European opportunity.

Conclusion:

Common consensus suggests that the demand for Alternatives and requirement for yield will be a vital priority for Investors for some time to come. Asset Managers with the ability to leverage a highly product literate, commercial client facing team will undoubtedly best positioned to capitalise. Consequently, the ability of a trusted search partner to access and secure top talent in a tight candidate market is arguably more important than some more traditional asset classes.

1. Chief amongst these in Europe are AIFMD and UCITS.
2. See McKinsey & Co, “The Mainstreaming of Alternative Investments. Fuelling the Next Wave of Growth” - p.5
3. A 3-year track record is usually the minimum required from Institutional investors.
4. This observation is supported by another 2011 McKinsey & Co paper, “Institutional Investor Global Survey”.