Adapting asset management business models for European expansion
Asset managers looking to grow their European presence should carefully consider which domicile to base themselves in and how to meet investors' changing needs.
Fears among leading central banks and economists around European economies entering into recession during 2023 have not so far come to fruition. Despite this welcome news, geopolitics and long-term economic issues are still casting a shadow over much of the continent.
Uncertainty, however, should not blind asset management firms to the opportunities in Europe to build their businesses. Those considering expansion can succeed, provided they take a judicious decision-making approach to mitigate risk and thrive in this new environment.
Choosing a domicile
In looking to access Europe’s €32.2tn ($33.8tn) in assets, choosing the right fund centre is crucial. The three continental fund domicile powerhouses – Germany, Ireland and Luxembourg – all deserve serious consideration for any investment manager looking to enter the region. Ireland and Luxembourg are preferred if distribution to multiple jurisdictions is planned. Germany, on the other hand, would be the key hub if this largest European market for investors is the primary focus of any distribution strategy.
Germany is an established fund domicile, and the third largest in Europe, with €3.8tn in managed assets. Investors considering domiciling there should bear in mind that unlike Ireland and Luxembourg, the German regime is geared towards products sold in Germany, rather than exports to other countries.
Ireland is a strong contender and currently the third largest fund domicile in the world with €3.7tn in assets under management (AUM), with Irish funds distributed to more than 90 countries globally. It is the only English-speaking country within the EU and has a mature ecosystem comprising a proactive regulator, management companies (ManCos), consultants, and law firms. Additionally, the common law system is similar in the UK and US, another reason Ireland is favoured by US and UK managers
Luxembourg is another leading domicile, with European mainland location and reputation for resilience and stability. It is estimated that Luxembourg had €5.1tn in AUM at the end of March 2023. Despite representing a slight fall, this highlights the domicile as one of the world’s foremost investment fund centres and Europe’s clear leader. Luxembourg-domiciled investment funds are distributed in 70 countries.
Clearly, all these domiciles have their own benefits, and it is vital that asset managers undertake thorough due diligence when choosing a fund domicile that best fulfils their needs and aspirations – be it one of the top three or another jurisdiction.
ESG priorities
In the current economic and geopolitical climate, investment firms are reassessing how they can meet investors’ changing needs: for example, making private markets, historically the preserve of institutional investors, more accessible to retail audiences and building out digital distribution capabilities.
Despite some challenging headlines, environmental social and governance (ESG) investments are here to stay, remaining a priority for asset owners and managers in Europe. European-domiciled ESG assets are set to reach a value between €7.4tn and €9tn by 2025, according to research by PwC. The green transition continues to provide long-term investment opportunities.
Focus on investment process
Uncertainty and unforeseen issues are inevitable, as evidenced by events such as Russia’s invasion of Ukraine. Therefore, asset managers need to review business strategies to ensure they can adapt to new economic realities of volatile market conditions.
Most asset management firms prioritise cutting costs to match up with competitive pressures. When seeking to reduce costs, however, consideration should be given to what areas of their business can be outsourced, rather than cut completely. Such consideration will not only help to cut expenditure but also deliver a better, more streamlined service.
This is an area where independent ManCos are proving extremely useful.
One of the great benefits of this model is that it provides the opportunity for asset managers to outsource important and valuable but time-consuming governance work, allowing them to devote more time to their core focus – generation of alpha in the investment processes and raising assets through distribution activities. Employing the services of an independent ManCo can also transfer this necessary cost from a fixed to a variable one.
Many asset and wealth managers are looking for relief from the burden of responsibility for managing complex regulatory frameworks. Today, with increasing sanctions and financial penalties for transgressions of international rules, it is more important than ever to ensure legal and compliance requirements are met.
Keith Milne is CEO and country head Ireland at Universal-Investment
