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Asset Managers Pursue Growth Strategies As Competition, Fee Compression Affect Revenues

Last Thursday at Mergermarket’s annual Financial Services Forum in NYC, several speakers from major financial institutions identified emerging markets, private credit and fintech as major growth areas for traditional and alternative asset managers. 

Asset managers have been aggressively pursuing growth strategies amid continued compression in fee revenues, the rise of passive investment strategies, asset rotation, stubborn operating costs, and emerging competition from robo-advisory tech companies.  

The most recent earnings season spurred concern among traders and prompted a drop in stock price for many publicly traded asset managers and banks, including household names BlackRock, State Street Corp, and Franklin Resources. 

Following these market development, asset managers of all stripes will need to find ways of reviving their bottom lines through mergers, entering new markets, and/or investing in new technologies. 

Emerging LatAm Markets & Fintech Companies  

According to KPMGin the Americas region, which includes major emerging market economies, fintech investment in 2018 is well on track to exceed 2017’s totals. VC investment was particularly strong, reaching a new quarterly record of almost USD 3.3bn during 2Q18. Overall M&A and VC deal volume in the Americas also achieved new peak highs in both 1Q18 (250 deals) and 2Q18 (254 deals). 

Unsurprisingly, the US market captured most of the share in fintech investments throughout the Americas, though Brazil, Mexico, Chile and Argentina are witnessing growing activity. In fact, Brazil-based Nubank held the fourth largest VC round in the region during the first half of the year with a USD 150m Series E raise.  

Investors are expecting Brazil to become even more hospitable to fintech innovation and investment as newly elected President Jair M. Bolsonaro looks to make reforms to government spending, taxation, and regulation. The market will have to wait until after he is sworn into office on January 1, 2019, however, for any reforms to become official. 

Regardless of policy, Brazilian consumers have displayed an incredible inclination to make purchases, borrow money, and make other transactions online. Brazil’s e-commerce segment has grown 20% year-over-year even as its GDP stayed flat . The country’s online users represent the fifth largest internet and mobile economy in the world, while it also represents a top-five market for Facebook, Google, and Twitter based on number of users.  

“These statistics are staggering considering that in 2015, only half of Brazil’s population was online,” wrote Ivana Ferreira, head of Nasdaq’s Listings and Capital Markets in Latin America. 

The structural disparity in economies between the US and those of Latin America have made all the difference. Latin America-based fintechs have grown on a more electronically organic basis whereas US startups have had to compete or partner with global incumbent firms operating mostly in the payment and lending segments. It seems as if the golden age of retail branch banking may have passed by Latin American consumers — countless customers in the region who have not had access to bank accounts or credit have discovered these services with a swipe of their phone screen.  

“The structure of banks — they’re often too old,” Amparo Nalvarte, CEO and co-founder of Culqi, a Peru-based startup that processes USD 5.2m in transactions per month for 180 merchants, told the Miami Herald on Monday. “[Less than 50 percent] of the region’s population doesn’t use banks because they do not trust the banks. So that’s a huge opportunity for a lot of fintechs solving problems like lending, currency-exchange conversion, and transfers.”

That’s telling of the culture and consumer behaviors of Latin Americans, which tends to favor fintechs 

Another example, MercadoLibre is a fintech startup that is focused on promoting financial inclusion in Latin America.  

According to Pedro Arnt, EVP and Chief Financial Officer at MercadoLibre.com"Two thirds of these sellers use the credit to buy new goods and increase sales in our marketplace, and 7 out of 10 take a second loan. What's more: 80% of them are not in the traditional financial system, so they do not have access to traditional means of credit.” 

Exploiting Opportunities  

While Latin American entrepreneurs and business owners are full of bright ideas, it’s the stock of value-added capital that is lacking in the region. That is where the opportunity lies for traditional and alternative asset managers. Yet, if young, budding entrepreneurs do manage to garner the attention of a US-based VC or a growth equity shop other challenges remain, such as currency exchange rate volatility and other macroeconomic headwinds. Outfits like Miami Angels, a group of venture capitalists, require companies that they invest in to be able to setup a location in South Florida, hedging against some of those difficulties.  

On the private credit side, there is an expectation that more players will pile into this space as risk aversion and tough regulatory burdens hamper bank lending.  

“When asked whether they plan to deploy more, less, or the same amount of capital to the various private credit markets, respondents were clear: more respondents predict increasing their allocation than decreasing it across every sub-sector of the private credit market. Optimism is highest in relation to SME and mid-market lending, as well as distressed and asset-backed lending,” noted the authors of an industry report entitled “Financing the Economy 2018,” which was jointly produced by law firm Dechert LLP and the Alternative Credit Council.  

According to the report, the preponderance of private credit firms are headquartered in the US, UK and Europe, while investors can be found around the globe mostly concentrated in the US, Europe, Asia Pacific and UK. Interestingly, data revealed that private credit asset managers are sourcing deals mostly through direct relationships with a borrower, private equity firms and banks. 

Aside from fintech and credit investments, sector agnostic asset managers are giving emerging markets a hard look and pouncing once regulatory reforms are implemented. In fact, Franklin Templeton Investments officially entered the Israeli retail market on Tuesday immediately following the government’s move to allow foreign firms to offer offshore products. The firm has avoided deepening its positions in Turkey and Saudi Arabia because of policy uncertainty.  

“Over the years, we have been witnessing Israeli investors’ increasing preference for foreign investments,” Jennifer Johnson, president and chief operating officer of Franklin Templeton, told Reuters at the opening of the group’s new office in Tel Aviv. 

Franklin Templeton continues to eye opportunities in Brazil, Mexico, and Indonesia.  

Recently, exchange-traded product sponsor and asset manager WisdomTree Investments announced that it had also changed its investment methodology in its WisdomTree Emerging Markets Consumer Growth Fund to take advantage of the opportunities that come with growing middle class in China, India, Taiwan, South Korea and elsewhere.  

“We at WisdomTree felt we could improve on this methodology by broadening the basket to include stocks outside of the consumer sectors that can also benefit from this rising middle class and by taking a more fundamental approach  focusing on quality growth companies while remaining sensitive to valuations,” wrote Tripp Zimmerman, associate director of research for WisdomTree, on the company’s blog 

Matt O'Brien Content Editor Acuris Studios (moderator)

Matt is content editor for Acuris Studios, the sponsored events and publications division of Acuris Global, since 2016. He curates content for the events team by overseeing research of market trends and transactions relating to corporate M&A and project finance. Matt works with the news editors and reporters of Acuris’ various publications, meets with market practitioners, and stays current with recent developments to ensure the company delivers industry-leading conferences. He also blogs about economic and market trends that affect the financing and structuring of M&A transactions and projects throughout the Americas.

Matt spent nine years in the news reporting industry covering a wide variety of industries and beats as a freelancer and as an employee with various publications. For five years, he worked in the financial services sector conducting research and relationship management for the mass affluent clients of AXA Advisors and then Wells Fargo.

Matt holds a B.A. from Rutgers University where his degree was in Political Science and History. He graduated in 2003.

Follow Matt on Twitter and LinkedIn.

Matt O'Brien Content Editor Acuris Studios (moderator)

Matt is content editor for Acuris Studios, the sponsored events and publications division of Acuris Global, since 2016. He curates content for the events team by overseeing research of market trends and transactions relating to corporate M&A and project finance. Matt works with the news editors and reporters of Acuris’ various publications, meets with market practitioners, and stays current with recent developments to ensure the company delivers industry-leading conferences. He also blogs about economic and market trends that affect the financing and structuring of M&A transactions and projects throughout the Americas.

Matt spent nine years in the news reporting industry covering a wide variety of industries and beats as a freelancer and as an employee with various publications. For five years, he worked in the financial services sector conducting research and relationship management for the mass affluent clients of AXA Advisors and then Wells Fargo.

Matt holds a B.A. from Rutgers University where his degree was in Political Science and History. He graduated in 2003.

Follow Matt on Twitter and LinkedIn.

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