Transformation: A matter of survival for alternative asset managers

Over the past few years, the alternative asset management industry has undergone profound changes driven by consolidation and increasing fee pressure from global institutional Limited Partners (LPs). These trends are reshaping the competitive landscape and forcing private equity firms notably to rethink their strategies. How can alternative asset managers adapt to these challenges and remain relevant in a rapidly evolving market?

Continuous consolidation and fee pressure on the alternative industry

One major consequence of these shifts is the consolidation of alternative asset managers (AAMs) into global platforms, along with the persistent pressure on management fees. These dynamics are redefining industry structures and compelling firms to explore new operational models to maintain competitiveness.

Consolidation of alternative asset managers

This consolidation trend among AAMs is driven by the need for economies of scale, diversification of product offerings, and enhanced operational efficiencies amid a globalizing industry. Larger firms are acquiring smaller ones to expand their geographic reach, diversify their investment portfolios, and leverage synergies. Additionally, the race to grow assets under management (AuM) has intensified, fueled by the listing of many asset management companies. Publicly traded AAMs seek to attract more institutional capital, enhance market visibility, and increase valuation, further accelerating industry consolidation. This dynamic allows AAMs to better compete in a crowded market and meet the growing demands of leading institutional investors, such as insurance companies, pension funds, and sovereign wealth funds. 

Let’s give few examples: in August 2024, T. Rowe Price announced the acquisition of Oak Hill Advisors, a leading alternative credit manager, to diversify its investment strategies. 

In January 2025, Apollo announced that it has entered into an agreement to acquire Argo Infrastructure Partners, a mid-market asset manager targeting essential infrastructure assets in North America, in a stock and cash transaction. At closing, Argo will add approximately $6 billion of assets to the Apollo infrastructure platform, as well as an experienced team of more than 20 professionals focused on core and core plus infrastructure equity opportunities. 

Similarly, in August 2024, Axa Investment Managers completed the acquisition of Capza, a European private equity firm specializing in mid-market investments. This acquisition was part of Axa's strategy to enhance its position in the alternative investments market in Europe. Capza, which focuses on investing in mid-sized companies across Europe, the Middle East, and Africa, will contribute to Axa’s expanding private equity capabilities. Previously, Axa IM had acquired a majority stake in Capza in 2022, and this full acquisition marks a key step in Axa’s broader strategy to strengthen its alternative investment platform, particularly in leveraged buyouts (LBOs) and direct lending.

Fee pressure and shifting models

Fee pressure is another significant factor reshaping the industry. This pressure is forcing some middle-sized AAMs to rethink their fee structures, moving from models based on commitments to those based on AuM. The goal is to align fees more closely with performance and value delivered to LPs. This shift is also driven by the increasing competition among AAMs, as they strive to differentiate themselves and attract capital in a market where large institutional investors have more options than ever before. But shifting from commitment to AuM is not an easy exercise as it requires deploying commitment rapidly with a diversity of products and jurisdictions, to compensate for the loss of income (i.e., two to three folds lower on AuM vs. commitment over the fund lifetime) in an industry having cost base mostly of fixed nature.

According to a recent survey conducted by Preqin  the average management fee rates on AuM for 2024 vintages and fundraising appear to be more advantageous for LPs, standing at 1.74% for buyout and 1.93% for growth capital, compared to 1.85% and 1.97%, respectively, in 2023. This trend in fee development signifies a decline for the second consecutive year. Based on this Preqin analysis, with fundraising pressures anticipated to persist through 2026, average buyout fees may continue to decrease over the next two years.

Influence of Limited Partners and regulatory pressures

The pressure on fees and the need for consolidation are not just market-driven; they are also influenced by regulatory bodies.

LPs are pushing for cost reductions and more efficient operations. They want their investments to be managed cost effectively, with a focus on regular distributions that maximize returns. For instance, in the current environment, where margins are being squeezed, LPs are demanding greater value for their money.

Additionally, regulatory bodies, such as the SEC in the U.S. and the CSSF in Luxembourg, are imposing stricter controls, particularly in scrutinizing fees, to mitigate risks and prevent systemic failures. These regulations require LPs and AAMs to adopt more robust risk management practices and enhance their operational resilience and reporting capabilities. AAMs thus face the dual challenge of managing their own growing regulatory burden while also addressing the regulatory demands of their LPs, who frequently lack the resources to handle the increased reporting requirements and complexity of their alternative asset portfolios. For instance, regulations such as the Digital Operational Resilience Act (DORA), ESG or ATAD 3 in Europe have introduced new compliance requirements that AAMs must navigate.

Technological investment and operational efficiency

AAMs therefore must invest in technology and operational infrastructure to enhance their reliability, efficiency, timeliness of reporting and scalability. This includes adopting advanced data analytics, automation, and digital tools that can streamline processes and improve decision-making. By leveraging technology, AAMs can gain a competitive edge and increase their strategic value before going public, or before being acquired by a bigger player, looking for a plug-and-play integration.

Operations are a key component of success

An operating model in the alternative investment industry refers to a framework that outlines how an investment firm manages its portfolio companies to create value and achieve investment objectives. This model typically includes key components such as governance structure, performance metrics, operational expertise, and financial management. In our context, the operating model primarily focuses on delivering accurate financial reporting, especially in the back office, rather than front-office operations. It is designed to operate efficiently and quickly, managing costs effectively to provide value to LPs. This approach ensures that portfolio companies are managed effectively to achieve strong financial outcomes and generate value for the shareholders of Asset Management Firms (AAMs).

Operations in the alternative industry are not just about understanding the business; they also require the ability to provide quicker, insightful and cost-effective reporting to the investors. By leveraging deep market knowledge and data-driven insights, the first movers can gain a competitive edge and make informed decisions that positively impact their portfolio's performance.

Measuring and communicating gains

Any gains achieved through transformation must be measurable and adequately communicated. Demonstrating the ability to implement successful transformations that align with market requirements is essential for building LPs and shareholders’ confidence and securing future LPs’ investments. This involves setting clear performance metrics, tracking progress, and providing regular updates to stakeholders to ensure transparency and foster trust.

Efficiency gains of 20% to 30% can be achieved and significantly impact the return on investment on the portfolio. However, these gains are only feasible and sustainable if the right amount of time, skills, and priorities are clearly defined upfront. It is crucial for AAMs to ensure that milestones and specific goals are outlined as part of their strategy, enabling clear tracking and assessment of progress.

The importance of a clear strategy

A well-defined strategy with concrete milestones is essential for a successful transformation. AAMs must integrate operations and talent into their long-term vision while ensuring that all stakeholders are aligned. To achieve this, they need to set clear priorities, provide structured guidance, and maintain consistent communication. 

Collaboration between the front office and operations teams ensures that the transformation efforts remain strategically relevant and effectively executed. By fostering cross-functional cooperation and maintaining transparency, AAMs can drive efficiency and address stakeholders' needs in a timely manner.

What really matters to transform your operating model?

Transforming the operating model is crucial to becoming an attractive acquisition target and/or becoming a market leader. A well-executed transformation can derisk operations, enhance scalability, improve efficiency, and create significant savings. These changes also lead to measurable improvements in margins, portfolio performance, and fund returns, without forgetting the profitability of the AAMs themselves.

To achieve successful integration, AAMs must focus on several key factors.

Optimizing processes, technologies, and talent is vital for achieving scalability and operational efficiency. This involves streamlining workflows, adopting best practices, and leveraging technology to automate routine tasks. For example, implementing a robust cash management system can provide real-time insights into investment performance and facilitate data-driven decision-making. These tools help AAMs not only stay ahead of competition but also enhance the accuracy of their operations.

Integrated solutions across the investment life cycle: a successful transformation also requires an integrated solution throughout the entire life cycle of a fund and its investments. This necessitates expertise across several domains, such as regulatory compliance, finance, and reporting. However, such expertise will only be effective if proper coordination and governance are in place to ensure seamless integration and execution.

Data plays a pivotal role in the transformation process. Properly managed and structured data enables AAMs to provide meaningful and centralized information within a secure environment. This allows for better forecasting and ensures that AAMs are responsive to market demands and expectations. When data is handled effectively, it builds trust with management, LPs, and regulators, making it easier to adapt to future trends and requirements.

Partnering for transformation

Whether insourced, co-sourced, or outsourced, securing the right support is crucial for defining a relevant, adaptable, and sustainable operating model. Choosing the right partner to advise, implement, or provide services is essential for a successful transformation. The ideal partner should not only have deep credentials but also demonstrate their ability to implement similar transformations within their own organization.

For instance, a global private equity firm specializing in buyouts of mid-market companies encountered significant challenges related to the complexity of its processes and data flows. The firm was constrained by legacy systems, which limited flexibility, integration, and scalability. Additionally, the complexity of data integration was exacerbated by the diverse sources from various departments and the multitude of applications in use. Regulatory constraints and limited resources further complicated matters.

As a trusted partner with a proven track record, we were able to assist this firm by identifying and implementing proven technology solutions. We also led the project management efforts to achieve measurable benefits. The examination of current financial processes and data workflows identified bottlenecks and redundancies, which were addressed through the implementation of targeted technology enhancements. This project was managed by experienced professionals adept at handling complex initiatives without disrupting ongoing operations.

Initially seen as a cost center, the operations were transformed through a successful cash management strategy that ultimately generated income to fund the transformation. As a result, the firm saw a reduction in costs by 10% to 20%, along with enhanced security and an increase in investor confidence.

In closing, the consolidation of AAMs and the increasing pressure on fees are driving significant changes within the industry. To succeed in this evolving landscape, AAMs must embrace transformation by optimizing their operations through integrated solutions that place data at the core. By defining a robust strategy in advance and collaborating with experienced partners, AAMs can enhance their appeal to larger firms, improve operational efficiency, and deliver greater value to their investors.