The asset and fund management industry has gone through significant changes in the last few decades, noted moderator and independent director John Holloway. Holloway was introducing a panel discussion on operational excellence in fund management during the Luxembourg Private Equity & Venture Capital Association’s annual Insights conference on 17 October 2024 at Luxexpo. What are some of the main trends and changes that have happened in the industry since then?
For Gautier Laurent, managing director and head of Cinven’s Luxembourg office, the grand duchy is a “great place” to deploy funds. But beyond that, Luxembourg has the people and the mindset to deploy new ways of thinking and operating--and to do that more quickly than other financial centres. “What I have seen in the last couple of years is that we have been more agile than our colleagues in London to deploy the operational side of things,” he said. “We are agile. Our people here are agile.”
Looking at the landscape and the market more generally, ICG’s head of Luxembourg Hind El Gaidi said that she has seen “evolutionary changes” as well as “revolutionary changes.” On the “evolutionary side,” sponsors have grown in size and increased the size of their funds, teams and tickets. They’ve also changed how they’re deploying their capital, creating value and diversifying their limited partners. On the “revolution side,” new products and new markets have appeared. “Innovation in products usually marries innovation in operational excellence, she added, “because operational excellence is the combination of what you have in terms of processes and technology.” To be able to have secondaries or open-ended funds for retail investors, for example, you have to be able to innovate--operationally speaking. Innovation in products and markets “can only happen if we are able to deliver on that operational excellence.”
There’s more regulation than before, added Fabrice Jeusette, managing director at Apollo Global Management and head of the Luxembourg office. That means more work when it comes to compliance and the need to find ways of doing things better and faster. The emergence of different types of investors (like retail investors), asset classes and instruments brings with it new territory, whether it comes to services or fees. Firms need to be able to adapt to that, as well as the increased competition. Thirty years ago, there was “almost no one” involved in private equity; today, there’s a room full of PE experts, noted the panellists.
“But when there is more competition, it means that this is a more mature market,” said Jeusette. “And when it’s a more mature market, it’s time to think about your operational model to ensure that you are still ahead of the curve.”
The “-tions”
Internationalisation, standardisation, democratisation, retailisation, regulation and innovation--there’s no shortage of “-tions” in the industry, said Holloway. What is their impact on the industry?
For El Gaidi, regulation can also drive innovation. A major challenge that the industry faces today is the cost to comply with “layers and layers of regulation,” along with a high “velocity” of deployment. Regulation can be used to push innovation and become more efficient, thus creating a “new frontier” for operational excellence.
Retailisation is the “next bucket of growth,” argued Laurent, but it’s important to note that retail investors have different needs compared to other types of investors. For Laurent, retail investors will put “interactions” first and returns second. The fees that firms earn won’t be the same, and the only way to reconcile costs and fees is to become more efficient.
Role of artificial intelligence
When it comes to regulations and reporting on environmental, social and governance (ESG) criteria, there’s more and more data from an increasing number of sources, making comparability a key challenge, said Laurent. To efficiently deal with the massive amount of data, he saw two options. One is to use artificial intelligence; the second is to see if regional or international trade associations could agree on a set of frameworks.
Setting up standardised templates could help, but the “velocity” of the funds and products appearing in the market is another element to consider. In addition, you also need to have the capacity to process, digest and analyse that data. Both scenarios can co-exist, said El Gaidi. The market is at a tipping point and using technology like AI is no longer just a competitive advantage--it’s necessary.
Everybody is talking about artificial intelligence nowadays, noted Jeusette, and it’s the new buzz. But there are still a lot of question marks around subjects like confidentiality or information management. AI can boost efficiency, but it’s important to invest in something that counts and is not just buzzy.