Blended assets, ESG, fluid working: Our fund industry predictions for 2022

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After an iConnections Global Alts conference full of energy and ideas, Intertrust Group reveals its outlook for the fund industry in the coming year

Predictions are hostages to fortune at the best of times. At the start of the third year of a global pandemic, that's even more so.

But as a sponsor of the iConnections Global Alts 2022 conference, we have spent the last few days immersed in stimulating and wide-ranging debate about the future of the fund industry sector. So here is our forecast for the year ahead.

There will be a continued push towards a blend of asset classes, driven by private credit

Siloed asset management will continue its steady decline.

That has been happening for some years, but investors are showing an ever greater appetite for blended asset classes - a mix of liquid and illiquid assets as well as more diversity within alternative funds.

That will grow in 2022, fuelled by the continuing quest to balance high returns and low volatility. Investors are all too aware of the worth of private credit in alternative portfolios that might also include hedge funds, derivatives and commodities.

It remains to be seen how rising global interest rates affect that balance. A background of rising prices and, as seems likely, steady interest rate growth will be a test for the private credit business in the coming year.

The good news is that private loans historically offer lower volatility and higher returns than public markets, and remain attractive even in a rising interest environment. Managers may have to deploy all their skill and experience to identify the best deals, mind.

Generally, the blended approach can lead to diverse, balanced portfolios that reduce risk, but it inevitably adds complexity. It can also lock up money for long periods, creating liquidity challenges.

As a result, institutional investors in particular want more reassurance, in the form of data visualisation and portfolio transparency, than has been traditional with private credit. They want to understand fully liquidity horizons and where their risks lie.

Providing transparency is part of the fund manager's role. That's where the support of a third-party administrator like Intertrust Group, equipped with the latest technology, can be invaluable.

Private equity funds have traditionally been self-administered, but fund managers are increasingly turning to independent third parties to create an additional layer of trust around reporting, cash flows and valuation. Note, too, the growth of registered Business Development Companies (BDCs), which also aim to increase transparency and standardise reporting around specific assets. With more interest in complex blended assets than ever, the trend towards greater transparency is only likely to increase in 2022.

ESG focus will tighten as sustainability targets creep closer

On Environmental, Social and Governance (ESG), 2022 will be the year when actions speak louder than words.

ESG reporting will continue its journey to the mainstream. At investors' behest, funds will accelerate their exit from businesses that can't prove ESG compliance.

Fund managers won't find this easy. Significant costs are associated with withdrawal from industries that continue to drive returns, despite concerns about their environmental or social impact.

But more managers will be ready to take that risk. The US, for one, is in the middle of a huge transfer of wealth from older to younger investors - and younger tends to mean greener.

Institutional investors will also come under mounting pressure to divest from unsustainable industries and channel cash into ESG-compliant funds.

Attempts to prove that compliance will continue to be undermined by inconsistent global standards. That is why so many administrators are turning to third-party experts with ESG-focused fintech to make sense of the data regulators and investors demand.

Ultimately, this is an investor-driven trend as much as a regulatory one. Though expectations differ around the globe, the direction of travel is clear: ESG compliance is increasingly expected. If you have sidestepped ESG so far, 2022 may be the year your position becomes unsustainable.

Working models remain fluid - agility is key

The iConnections Global Alts conference demonstrated pent-up demand for contact and confirmed the importance of sharing ideas and inspiration with peers in the same physical space.

In fund management, it seems the demise of face-to-face meetings has been greatly exaggerated. The industry still relies on the personal relationships and caffeine-fuelled conversations that nurture mutual trust.

Certainly, a major concern for both fund managers and investors throughout the pandemic is that, while it is easy to check in with existing contacts via Zoom or Teams, it is far harder to build the new relationships on which success depends.

Of course, remote work is popular with employees and hybrid working is likely to become the default. But businesses must remain flexible in 2022. It might be unwise to make definitive decisions on new work models until the fog of the pandemic lifts.

In the back office, many managers will turn to outsourcing for a scalable and cost-effective solution to the difficulties created by remote working and the Great Resignation.

Elsewhere, fund managers might be best advised to avoid acting hastily. One of many take-homes from Global Alts is that, at its cutting edge, the fund industry feeds off the energy of face-to-face contact. New work models must take that into account.

Why Intertrust Group?

• Our 4,000 industry experts give our clients the ability to scale quickly; from start-ups to publicly listed asset management firms we are the partner that enables sustainable growth.
• As a strategic partner, we offer a full-spectrum service tailored to meet all back-office needs throughout the lifecycle of a private capital fund. This against a background of ever-increasing reporting demands.
• Our proprietary innovative technologies are combined with global knowledge and experience to deliver added-value services catering for all asset classes, while increasing manager visibility of portfolios on behalf of a fund's investors.
• Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations and portfolio management.
• We offer bespoke, scalable solutions for fund managers of all sizes to meet administration requirements so they and their partners can concentrate on investor relations, fundraising, closing deals and profitable exits.
• We help funds navigate the increasingly complex regulatory environment with solutions tailored by jurisdiction and specific compliance requirements.