The FINANCIAL — The asset servicing industry appears poised for expansion in the next five years, with globalization and regulatory changes driving growth, according to New opportunities for asset servicing, EY’s Global asset servicing study.
The asset servicing industry, which provides infrastructure and connectivity for market participants and supports middle- and back-office operations of the world’s investment funds, has averaged 15% growth in assets under administration in three of past four years. Fifty-one percent of asset servicing companies surveyed in the Americas, Europe and Asia-Pacific believe globalization and opportunities in new geographic markets will drive future growth, while 41% see regulatory changes as a growth opportunity.
Keith Caplan, Principal, EY Wealth & Asset Management, says:
“Seismic shifts in the industry have resulted in greater demand for asset servicers’ offerings. Tomorrow’s winners will move from offering individual services toward an integrated service model where global platforms offer scale that appeal to a broader range of asset managers and asset owners. Asset servicers that recognize today’s growth opportunities will be those that make the right investment decisions to manage the ever-increasing demand for their services.”
Regulations are a growth opportunity, but also a risk
Despite identifying opportunities for growth, 73% of companies surveyed see the impact of regulations as the greatest risk facing the asset servicing industry. Changing requirements have made strategic decisions more difficult for asset servicers, who cite the burdens placed on managers and the potential regulatory oversight of asset servicers themselves as they expand.
New regulatory demands are increasing costs and operational burdens for asset managers, with 77% of asset servicers’ clients globally now asking for Foreign Account Tax Compliance Act (FATCA)-related solutions, and 41% are asking for solutions related to the Alternative Investment Fund Managers Directive (AIFMD).
As a result of AIFMD in particular, 94% of asset servicers offer clients regulatory reporting, 81% offer depositary “lite” services outside the European Union, 71% offer risk management support and reporting, and 68% offer full depositary services in the EU, the survey finds.
Asset servicers see advances in data aggregation and reporting capabilities as a competitive advantage to support future growth. Seventy percent of firms globally have invested in data aggregation and reporting capabilities as a result of added regulatory reporting requirements and their clients’ demands for increased transparency.
North America and Asia offer revenue growth potential
Asset servicers expect increased investment in the United States from overseas funds, as well as interest in markets such as China, as investors look for market diversification. Fifty-seven percent of survey respondents believe North America will provide the most revenue growth opportunity in the next five years. Asia offers the second-largest growth opportunity for asset servicers, primarily due to the operational complexity and fragmentation within the region, according to 23% of all respondents.
Asset servicers have seen increased demand from the large regional asset owners in Asia, including sovereign wealth funds, government-backed pensions and superannuation funds, which are driven by a more global investment strategy and greater sophistication in allocating to alternative asset classes, the survey finds.
Hedge funds and private equity are prime growth opportunities
Seventy-seven percent of respondents globally view hedge funds, which have the single largest proportion of assets under administration, as the leading revenue-growth segment for asset servicers over the next five years. Asset servicers particularly will focus growth efforts on the middle office in hedge funds.
Private equity represents just 10% of assets under administration, but 51% of respondents see this segment as a major growth opportunity, mainly because of the increasingly large and complex investments from pension funds and other asset owners.
Asset owners will continue to increase allocations to private equity, real estate, hedge funds, credit investments, emerging markets, infrastructure and mutual funds, according to the survey. Regionally, nearly all asset servicers in Europe believe they will see revenue growth from Undertakings for Collective Investments in Transferable Securities (UCITS), while Asia has the most asset servicers expecting growth in exchange-traded funds (ETFs).
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