KPMG International Study: Demands From Institutional Investors Seen as Transforming Alternative Investment Industry

Study also finds: Investors in U.S. want more product transparency, but no new regulations

Jun 09, 2010, 11:38 ET from KPMG LLP

NEW YORK, June 9 /PRNewswire/ -- The majority of institutional investors intend to increase their allocations to alternative investments over the next three years, carrying far greater influence over the shape of the industry as a result, concludes a KPMG International study titled "Transformation: The Future of Alternative Investments."

More than 50 percent of institutional investors surveyed said they intend to increase their allocations to alternatives, with some intending to allocate more than 10 percent of their total assets, according to the KPMG study, which surveyed 200 alternative investment managers, administrators and institutional investors in the U.S. and globally.

The study found that as investors increase their stake in alternative investments, they will expect institutional grade controls, increased transparency and flexible product strategies in order to invest their capital.  That, in turn, is expected to drive changes to business models, fee arrangements and servicing agreements.

"The study clearly indicates that institutional investors will be gaining power over the investment managers and they want to see managers' interests more closely aligned with their own," said Mikael Johnson, lead partner for KPMG LLP's Alternative Investments practice in the U.S.  The main changes will likely feature longer-term performance fee arrangements, increased capital investment from managers, and a move toward enhanced liquidity and transparency.

Regulation, Governance and Transparency are Top Challenges Facing the Industry

The KPMG International study said 97 percent of the administrators and 75 percent of the managers believe that regulation and governance are the most important challenges facing the alternative investment industry over the next 3 years.  Seventy-eight percent of institutional investors cited transparency as the most important challenge.  Sixty-seven percent of the investors cited regulation and governance as the second most important challenge.

Surprisingly, while regulation has been widely promoted as a way to protect investors, the study revealed that the majority of respondents are against increased regulation.

In North America, 67 percent of the institutional investors participating in the study said forthcoming regulations will have a negative impact on alternative investments.  Forty-four percent of the U.S. investment managers agreed as did 32 percent of the U.S. administrators.  They cited the belief that regulation will not produce any tangible benefits and will add costs and bureaucratic burden.

"The study certainly indicates that while investors are clearly looking for products with increased transparency and liquidity, they do not seem to be demanding regulated products," said Johnson.

Regulation could also reduce the number of new start-ups due to the increased costs and stall the industry's engine of creativity and limit choice, the report found.

Respondents See New Type of Manager

The study also revealed the creation of a new type of manager.  From a legacy of boutiques (e.g. five people with one strategy working out of an apartment), to super boutiques (increased global reach and size), a new type of manager is emerging – the entrepreneurial-institutional (EI) manager.

According to the study, El's represents a change along the path of institutionalization.  The study found they are more formalized and offer clients multiple products, including complementary services like financing, private placements, proprietary trading and structured products through multiple distribution channels.

Some of the other key findings in the KPMG survey included:

  • Larger institutional investors are moving to an allocation model with a clear trend in favor of direct investment and managed account platforms.  At the same time, allocations to fund of funds are falling.
  • Larger fund of fund managers with the resources to expand into managed accounts will diversify their offerings in other ways, and use their brand name to attract investment.  Many smaller players, however, are unlikely to be able to compete and the result could be a wave of M&A activity.
  • Administrators are not immune from investor influence as demands for reporting transparency and risk management support increase and force greater standardization.
  • Data demands from fund managers and regulators are also expected to swell exponentially, so administrators will need robust and flexible technology platforms that are capable of high-volume transaction processing and customized 'real-time' reporting.
  • Nearly three of four administrators are currently operating at between 71-100 percent of their technological capacity.  If the alternative investment industry grows as is forecast, administrators could face serious infrastructural issues.

About the Study

Obtained through surveys and structured interviews conducted globally between February and June 2010, this report compiles perspective from 200 respondents across 26 countries.  Respondents include alternative investment managers with US$515 billion under management; administrators with US$4.2 trillion under administration; and institutional investors with US$884 billion under management.  While the main focus has been on managers who invest in hedge funds, views from managers who also invest in either, or a combination of, the following: private equity, real estate, infrastructure and structured products, have also been incorporated.

About KPMG LLP

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International Cooperative ("KPMG International").  KPMG International's member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.

About KPMG International

KPMG is a global network of professional firms providing Audit, Tax and Advisory services.  We operate in 146 countries and have 140,000 people working in member firms around the world.  The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

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