- Asset managers to retain strong focus on sustainability in 2023, with new SDR regulation set to improve investor confidence and reduce the risks of greenwashing
- Alternatives market predicted to continue growth trajectory over coming year
- Digital asset regulation and legislation to be a priority focus in 2023
Dan Hall, UK Head of Wealth and Asset Management at EY, comments: “The current economic outlook and ongoing market volatility has created a challenging operating environment for the wealth and asset management sector in 2022 and this is expected to continue into 2023. Despite uncertain and challenging times, wealth and asset managers cannot afford to step back from driving the necessary structural changes required for longer term success. The areas of focus for 2023 include developing ESG capabilities, driving out unnecessary costs and inefficiencies, digitising operating models and positioning for growth in an increasingly competitive international market.”
Alternative Investments continue to grow in scale
Tim West, UK Alternatives Leader at EY, comments: “The alternatives market has seen gradual quarter-on-quarter increases in assets under management over 2022, and this momentum is expected to continue into 2023. Even in the face of market decline, political unrest and uncertainty, investors continue to see tangible value and remain invested in alternative funds, likely for diversification, risk mitigation and maximization of returns reasons.
“Private equity is also expected to continue to grow next year, overtaking hedge funds as the largest alternative asset class in the near-term. Meanwhile with interest rates still on the rise, the private credit market is expected to double in size over next two years. The fee model continues to be very attractive to both managers and investors, with performance-related fees generally ensuring a common interest for both parties.
“For long term investors that are drawing on near record high levels of dry powder, 2023 will be a strong year to consider taking advantage of heavily discounted and/or volatile markets. Alternative funds’ reputation of being a safe harbour in a storm is expected to maintain, offering diversification and protection to investors.”
ESG to grow in importance over 2023
“The ongoing rise in responsible and impact investing will continue to take hold in private markets over 2023, even though the cost of compliance will be material, impacting smaller and midsized firms most. Meeting investor ESG policy and reporting requirements is becoming increasingly important, and EY research of the market found that 26% of investors decided in 2022 not to invest with a manager because of inadequate ESG policies. This should serve as a warning to managers.
“The clamour for retail-like investors to participate in private markets is expected to continue unabated. Managers will remain focused on finding new pools of capital in the global wealth market, and wealth managers are utilising new structures and new technology platforms in order to satisfy this demand. New solutions are coming to market to solve the suitability and liquidity issues, and we can expect retail investment into alternatives to be a major theme in 2023 and beyond.”
Regulatory challenges ahead include UK/EU divergence
Anthony Kirby, Wealth and Asset Management Partner at EY, comments: “The Financial Services and Markets Bill (FSMB) introduced earlier this year represented the largest piece of financial services legislation for over two decades and signalled upcoming reforms to the sector. It also has a critical role to play in giving the UK the freedom to pursue new opportunities post-Brexit, by tailoring financial services regulation to UK markets to bolster global competitiveness. The FSMB introduced a high-quality, agile regulatory principle for the FCA and the PRA to help growth and achieve better outcomes for consumers and market practitioners alike. When combined with the drive to improve education in the financial sector, and coupled with last month’s publication of the UK’s Transition Plan Taskforce in the ESG sector, it provides an outlook of the measures that will help the UK adapt to both current and evolving regulatory provisions for wealth and asset management firms.
"Regarding ESG regulation, the UK’s current Sustainable Disclosure Regime (SDR) consultation is set to be fundamental piece of regulation that will guide firms on disclosure should improve investor confidence and reduce the risks of greenwashing.
“The UK is paying attention to the corresponding measures in the EU, but also internationally in markets such as the U.S., Singapore, Japan and Australia. The new SDR measures are expected to be finalised in early 2023 and aim to assure consumers and investors, and improve stability within the financial ESG system. The measures will also seek to work within other developing UK frameworks governing operational resilience, scale-level robustness and third-party risk management, whilst leaving the door open for more innovative solutions to emerge over the coming years.”
The tokenisation of assets
Amarjit Singh, EMEIA Assurance Blockchain Leader at EY, comments: "The efficiency gains that would arise from the tokenisation of assets, in addition to opening up private assets to a wider range of investors, are clear, and we expect activity on this throughout 2023. Many tokenisation proofs of concept have demonstrated tangible benefits from an operational and risk management capacity, and coupled with the power of smart contracts, there is a real opportunity to reduce manual errors and to automate many repetitive, currently manual tasks. Digital asset regulation and legislation is undoubtedly a priority focus for the UK as it drives progress globally on digital assets."
