McKinsey & Co. said money managers grappling with structural headwinds in 2023 could increasingly find opportunities for outsized growth from the restructuring of bank and insurance company balance sheets in coming years.
Over the coming decade, McKinsey predicted in its annual review of the North American asset management industry, banks’ continued pullback from lending - against a backdrop of tightening regulatory oversight - could spawn $5 trillion to $6 trillion in new business opportunities for asset managers, triple the amount that left banks over the decade through 2023.
Likewise, the growing number of insurers backed by or partnering with private capital could boost the asset management industry’s accessible market for insurance client assets by a further $2 trillion to $2.5 trillion, the report said.
A third source of demand – high net worth investors' growing appetite for private markets exposures – could add another $1 trillion to $1.5 trillion to the mix, leaving the combined expansion of money managers’ opportunity set over the coming decade through 2023 at between $8 trillion and $10 trillion, the report said.
That would potentially amount to roughly 15% of the $58 trillion in assets under management overseen by North American asset managers as of the end of 2023, McKinsey said.
The “big secular trend” of disruption and dislocation in bank and insurance company balance sheets will favor money managers positioned to compete for that business, said Ju-Hon Kwek, New York-based senior partner and leader of McKinsey’s North American asset management practice.
Joseph Lai, a New York-based partner with McKinsey, likened that coming flood of assets to “a big wind” set to blow across the ocean, with money managers that have the “sails to catch that wind…standing to benefit.”
For 2023, the industry could have used more high-margin opportunities, posting mixed results in what ostensibly looked to be a “banner year,” McKinsey’s report suggested.
After a wretched 2022 which saw the start of a central bank rate hiking cycle deal body blows to equity and bond markets alike, global AUM rebounded more than 12% to a record $121 trillion. But other key metrics failed to follow suit, suggesting secular headwinds.
McKinsey’s estimates for the latest year showed revenues “flatlining” at $228 billion, unchanged from the year before, while operating profit slipped 5% to $73 billion.
The North American asset management industry's $58 trillion in AUM at the close of 2023 was up a strong 16% from the year before, Lai confirmed.
The fact that the year’s biggest equity market gains only came in the fourth quarter contributed to the failure of revenues pushing higher but a bigger factor was a continued “mix shift” from high margin active equity strategies to lower margin passive strategies and fixed income.
McKinsey’s data for 2023 showed U.S. net outflows of $404 billion from active equities, offset only partially by $75 billion of passive inflows. Fixed income garnered $211 billion of passive inflows and $87 billion in active, while multiasset pulled in $70 billion and private market strategies raised $720 billion in commitments - down more than 20% from the prior year’s pace.
For the six months through June 30, meanwhile, outflows of $180 billion from active equity strategies were offset by $279 billion of inflows for passive strategies; fixed income pulled in $333 billion in active strategies and $142 billion in passive. Multiasset eked out $7 million of net inflows while private market strategies reported commitments of $336 billion.
Lower revenues
For the 18 months since the start of 2023, that shift from active to passive equity strategies shaved roughly $2.5 billion off of industry revenues, McKinsey’s report said.
Meanwhile, “across all public-market asset classes in the year and a half since the start of 2023, new money has been entering the industry at a fee rate that’s over 20% lower, on average, than that of the current pool of assets,” the report noted.
Such “stagnant industry economics” leave managers only so much room to fight for a bigger piece of the pie, McKinsey suggested, noting instead that “outsized growth needs to come from new pools of assets outside the industry.”
The balance sheet disruption banks and insurance companies are grappling with now could fit that bill.
The global asset management industry’s $150 trillion in AUM is a fiercely contested space - if not exactly a zero sum game, a close enough approximation, said McKinsey’s Kwek.
“But if you look more broadly, the number to look at is $450 trillion…the total global financial assets that we have – bank balance sheets, things on insurance balance sheets,” Kwek said.
Against that backdrop, with more than two times current asset management AUM to compete for, “it suddenly becomes an exciting industry, with lots of white space in it,” he said.
The balance sheet disruption for banks has been going on for the 13 or 14 years since the 2008 financial crisis, and perhaps six or seven years for insurers, noted Kwek.
Over that span money managers’ capabilities to manage bank and insurance company assets in private credit, direct lending, asset-backed strategies, infrastructure and real estate debt have expanded sharply. A number of bigger alternatives firms can now handle not only a far broader variety of credit opportunities but much bigger opportunities as well, making them credible alternatives to bank lending, he said.
McKinsey executives say depending on a money manager’s proximity to that balance sheet disruption opportunity, specific managers can see the current outlook as either sunny or downright gloomy.
Firms predominantly focused on active equities - especially those in mutual funds that are losing assets to competing vehicles such as active exchange traded funds, collective investment trusts or customized separately managed accounts - see not just a zero-sum game but a shrinking one, dogged by outflows and fee compression, said Lai.
A number of other firms, by contrast, “have been very forward thinking in terms of strategic partnerships, in terms of thinking about these new high growth areas such as private market alternatives and active fixed income, which has really come back in a significant way,” Lai said.
“Those firms are much more optimistic about their ability to not just grow the pie but to be able to participate in actually growing the pie,” he said.
High net worth channel
In other findings, McKinsey said the wealth channel serving high net worth clients remains a focus for money managers, with its just under half of global industry flows in 2023 exceeding its 44% share of total AUM.
Together with defined contribution’s 13% share of flows, client segments focused on individual investors accounted for over 60% of industry flows.
Elsewhere, corporates were the second-largest segment, accounting for 22% of net flows, followed by insurance companies, at 12%, and institutional clients – including defined benefit pension plans, endowments and foundations and sovereign wealth funds – which accounted for well under 10%.
Private market fundraising, meanwhile, declined 18% in 2023 from 2022, reflecting a “paucity of exits,” which in turn inhibited new commitments. But private credit remained a loan bright spot, with a 4% increase in fundraising, while private equity, real estate and infrastructure saw declines, McKinsey said.
McKinsey’s report showed alpha generation, while important, increasingly sharing the spotlight with other money manager strengths such as distribution muscle and product development skills among firms which led the way in gathering assets since the start of 2023.
McKinsey, while declining to name specific firms, noted that bigger money managers have garnered an increasing share of industry flows over the past 18 months.
