Fund managers in alternative asset classes are faced with tough macroeconomic and geopolitical conditions as well as fierce competition for investor capital. Despite these challenges, momentum is returning to the European market. To stand out, fund managers must leverage technology, optimize processes, offer flexible investment structures, and cater to ESG-focused funds. Staying ahead of regulatory changes is also crucial, as highlighted in CSC’s recent webinar.
Following the fundraising drought in the wake of the coronavirus and structural challenges in some alternative asset classes due to rising interest rates, both momentum―and competition are returning. CSC’s recent webinar, Fundraising in Europe and What Alternative Asset Managers Need to Know, addresses how to access this opportunity and how to pull ahead of the competition.
What are the key drivers behind the fundraising opportunity?
Better times have returned for alternative assets in Europe. According to Invest Europe, an association which represents Europe’s private equity, venture capital and infrastructure investment firms, 2023 saw the third highest-ever fundraising total in Europe, with €133 billion ($140 billion) raised across private equity, growth, and venture capital strategies[1] . Capital under management grew 9% in 2023, to finish at more than double 2017 levels[2].
In addition, the fifth annual edition of Invest Europe’s pan-European market sentiment survey for 2024 found that 83% of GPs expect the same or higher levels of fundraising in the following year, compared with just 50% in a previous survey[3].
Rate cuts by the European Central Bank in September 2024, with additional cuts likely, will incentivize investors to unlock capital into the alternative space. Yields stabilization traditionally motivates value-oriented investors, especially those looking to acquire underpriced real estate before valuations rise to reflect the strengthening economy.
Activity in the alternative assets space should continue to increase as global interest rates and inflation flatten which should boost investor confidence. The funding trajectory is expected to continue and exceed pre-pandemic levels.
How can fund managers harness growing demand?
Capturing this resurgent investor interest requires capitalizing on conversations between GPs and LPs. Ordinarily, most institutional investor capital flows towards conventional strategies. However, sophisticated managers of specialized funds can benefit if they demonstrate competitive yields high enough to justify the elevated risk.
This is when alternative fund managers need to have the tools and information ready to differentiate themselves to remain competitive in the market.
How can differentiators set a fundraising strategy apart?
When it comes to fund formation and positioning, managers seeking strong investor support should be flexible in structuring products that appeal to both traditional investors and the niche players with a higher risk appetite.
GPs who tailor their offering and accommodate investor-specific side-letter provisions to recognize large ticket sizes and incentivize early backers may reap commensurate rewards. An assortment of multiple parallel fund strategies and the capacity to structure separate managed accounts tailor-made to an investor’s profile will set a manager apart from their competition, as cited in our webinar.
Fund managers who mix evergreen funds and fixed-life investment vehicles will capture a wider spectrum of investors, notably large institutions with low horizon constraints and stable balance sheets. Hybrid investment strategies that offer a best of both worlds risk-return profile will help a fund manager stand out.
Best practice techniques to present and profit through differentiation, as mentioned in CSC’s webinar, include:
- Leveraging data and analytics to showcase business performance
- Optimizing technology and internal processes
- Enhancing overall service efficiency to win new business
How is technology transforming fundraising success?
Technology is increasingly vital in differentiating funds. Managers need to demonstrate system optimization through harnessing automation tools and experimenting with integrating AI into key processes.
Access to live data via interactive investor portals across systems is key to attracting investor interest. Investors now expect technology that streamlines onboarding and leverages reporting tools and dashboards for timely information. This technology should provide accurate and disaggregated data for downstream analysis.
Are ESG offerings a competitive advantage?
One additional area open to fund managers for differentiation is environmental, social, and governance (ESG).
According to the Institute for Energy Economics and Financial Analysis[4], ESG and sustainable funds continue to thrive and outperform traditional funds across equity and fixed-income asset classes. Fund managers who can present their investor audiences with appropriate vehicles will enjoy the benefits.
As discussed in the webinar, ESG-focused funds continue to receive a warm reception across the investor spectrum. Headwinds streaming from a coherent and coordinated global response to environmental risks dovetailed with the robust regulatory environment across continental Europe have significantly contributed to the attractiveness of this asset class.
What compliance challenges do fund managers need to solve in Europe?
Not least among the advantages of technology is rapid and effective compliance. Non-EU fund managers in Europe need to stay on top of the updated requirements that came into force in April 2024 with the Alternative Investment Fund Manager Directive 2.0 (AIFMD 2.0). Loan origination constraints and extensions to liquidity management provisions specifying the use of liquidity management tools also impact the funds’ operations.
Managers need to consider transfer pricing technicalities, and key legislation like the DAC 6 directive, which applies to cross-border arrangements alongside the anti-tax avoidance directive 1.0 and 2.0. Plus, the importance of key regulations like the EU’s Digital Operational Resilience Act (DORA) cannot be overemphasized in managing cybersecurity risks.
How can CSC help fund managers optimize fundraising and compliance
With offices in more than 140 jurisdictions, CSC offers specialized fund solutions with a team experienced across multiple strategies. We provide tailored fund administration and outsourcing solutions for alternative asset managers, ensuring compliance with global regulations.
CSC’s services cover all phases of the investment life cycle, from entity formation and compliance maintenance to supporting real estate, M&A, and other corporate transactions. Our comprehensive platform integrates tax, risk management, automation, and data transparency to help clients manage risk and stay compliant.
For more on how fund managers can compete for capital in crowded markets, watch the full webinar. Or visit the CSC fund solutions page for a full introduction to our global services.
[1] https://www.investeurope.eu/news/newsroom/europe-sets-3rd-highest-fundraising-total-ever-in-2023-as-private-equity-growth-venture-capital-investments-reach-100bn-for-4th-year-on-record/
[2] https://www.investeurope.eu/news/newsroom/new-record-for-european-private-capital-under-management-as-industry-reaches-115tn-in-2023/
[3] https://www.investeurope.eu/news/newsroom/green-shoots-emerge-in-h1-2024-private-equity-venture-capital-activity-survey-points-to-improving-sentiment-amid-rising-focus-on-ai/
[4] https://future.portfolio-adviser.com/esg-funds-outperformed-traditional-funds-and-etfs-in-2023/
