Commentary: Rethinking Europe — the multitrillion-dollar opportunity U.S. asset managers are overlooking

When it comes to the international revenue diversification of U.S. asset managers, all eyes have been on Asia — and particularly China — over the past decade. However, geopolitical tensions there and changing dynamics elsewhere should have them reassessing priorities.

Europe remains the second-largest asset management market after North America, and the industry there also benefits from secular growth drivers that offer fertile ground for U.S. managers to harness their domestic experience to seize new opportunities.

Several catalysts will fuel growth in Europe's asset management industry over the next decade.

• Defined benefit declines and defined contribution rises: Previously, U.S. managers expanding in Europe would set up a London base to leverage relationships with global investment consultants and financial institutions. The U.K. defined benefit market offered a natural first port of call, often followed by other large pension markets in the Netherlands and Nordic region. That playbook is now obsolete. London can no longer be the sole operational base due to Brexit.
  
• Also, DB plans everywhere are declining, so it is necessary to seek more attractive sources of capital. Private banks and insurance companies are growing channels in many countries. The move to defined contribution plans is accelerating, following a well-established U.S. pattern that's also underway in the U.K. Opportunities are increasing from pension reforms and the DB-DC shift in key asset management markets, including France, Germany, Italy and the Netherlands. By the end of this decade, an additional $10 trillion is expected to fuel AUM in this area.
  
• Wealth and retail as the new growth engine: We're seeing an increase in private wealth opportunities for asset managers across the continent, driven by:

1. A huge pool of excess liquid savings, further swollen by pandemic-driven measures. This money will be reallocated, despite the current rise in rates which impacts fund flows, as real returns remain negative and, over time, the generational wealth transfer and growing awareness of the pension funding gap are likely to combat Europeans' historical caution with investing.
   
2. The rise of digital distribution, which is driving new product opportunities.
   
3. The access to alternatives: The current AUM of private market products sold to wealthy and mass-affluent clients is already exceeding $400 billion in AUM in Europe, driven by traditional real estate products in large markets. Approximately €100 billion ($112 billion) was raised during the 2018-2022 period of low interest rates. Distributors and investors alike seek alternatives, offering new opportunities to managers able to offer attractive capabilities in private credit, infrastructure, private equity (including secondaries), and combining these exposures to build compelling investment propositions in hybrid liquid-illiquid vehicles.

• New regulations: Finally, new industry regulations (including the European Commission's Retail Investment Strategy) are placing the end investor at the center of focus. This will drive new opportunities for U.S. managers to harness their domestic skill set and experience, including: the transformation of open architecture with the rise of the subadvisory channel; increased personalization in the form of separately managed accounts or custom portfolios; applying an ESG lens; the delivery of investment processes in new formats, such as ETFs; and a model portfolio market coming of age.

Navigating the European regulatory framework remains a must-have for U.S. managers with global ambitions — from the use of UCITs structures, well regarded in many markets for the strength of their governance, to SFDR, which is becoming the default sustainability framework in other regions.

U.S. managers' ability to capitalize on opportunities in Europe will hinge on a few key success factors.

Accessing the European market requires adapted investment vehicles, so managers need to be thinking about how they amend their product lineups. It will also be critical to align investment capabilities with available local market and pan-European distribution opportunities and understand demand driven by FAs , banks, insurance, and pension funds.

Similarly, familiarity with European markets—beyond investment products—will help managers develop successful strategies. And while ESG faces headwinds in the U.S., managers entering Europe should be prepared for a regulated environment as it pertains to sustainability at both the European Union and national levels. Enhanced client expectations are driving demand around both investment and risk management processes and outcomes.

There are a few paths forward for U.S. asset managers to pursue these new foreign opportunities. The default go-to-market strategy is building a presence from the ground up, but it's not the only way.

One alternative path involves partnering with a relevant third party to fuel distribution efforts targeting specific segments or markets. This often seems like a "quick fix" but may not always deliver sustainable expansion benefits.

Another approach is inorganic expansion to turbocharge growth in a European market that remains extremely fragmented and ripe for consolidation. This should be particularly attractive to those with in-house tech capabilities. M&A will be a dominant strategic theme for the decade to come as: large bank or insurance-affiliated incumbents face difficulty expanding their business beyond the shores of their parent group; boutiques, which harbor much of the investment talent, often maintain a domestic bias and operate under a growth potential cap, struggling to build a regional, let alone, global presence; and independent private market GPs face the headwinds of diminishing institutional allocations and do not always have the critical size or business acumen to grow a wealth/retail footprint.

The ability for U.S. firms to expand into Europe is much improved, and the opportunity significant. With trillions of dollars in untapped AUM at stake, fortune will favor those bold enough to seize it.

Richard Bruyere is a managing partner, and Jim McCaughan is U.S. practice leader, at Indefi, an asset management strategy consultant. This content represents the views of the authors. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.