Expectations and opportunities in 2023
In 2022, Apex Group continued to disrupt the industry through product innovation and announcement of over a dozen acquisitions, including the successful close of the acquisition of Sanne Group. While we continue to face macro challenges, work through fiscal pressures and cost-of-living crises in many countries, in addition to a growing energy crisis and the broader issue of climate change, we are optimistic about the future of our industry.
Here, our experts share their insights for the trends and drivers that will shape 2023.
Peter Hughes, Founder & CEO, Apex Group
“In 2022 we continued to evolve and push boundaries - increasing the depth of our offering and local market knowledge on a global scale - but perhaps more importantly, we took responsibility along the way; announcing our lifetime offset of carbon emissions, launching our Women’s Accelerator Program, investing in digital innovation and evolving our ESG offering - all underpinned by service levels that deliver a great experience to our clients.
2023 marks Apex Group’s 20th year in business – which will be focussed on reinforcing our strong brand and culture with a focus on purpose. We are more than just a financial services provider, we want to leave a legacy we can all be proud of through driving positive change for our people, our industry and society.
The challenging macroeconomic conditions offer an inflexion point for all business leaders and we must embrace uncertainty and seek out the opportunities for innovation to support clients and employees in market dislocation. Businesses, including the private markets, need to do more in 2023 and take further accountability when it comes to climate change. It is not enough to talk about ESG as a fashionable topic, we need to see businesses having a genuine impact.
Our 20th year is our ‘time to shine’ – turmoil in the global markets may continue, but we see this as a unique opportunity for Apex Group’s continued growth and strong performance to standout against the backdrop of a global recession.”
“Notably, GPs are honing in on specialist areas to differentiate themselves from other managers including, sector focus, geographic specialism and deal specialism. Healthcare and tech focused funds have continued to be popular areas of focus in 2022 and will continue to do so in 2023.
We have seen an increase in continuation funds and activity in the secondaries market and I would expect this to continue into 2023. With valuations starting to plateau, managers are using continuation vehicles as a means of holding onto assets for a longer period of time without the pressure to exit. An extension of this theme has been the increased prevalence of Evergreen Funds with managers looking at options outside of the traditional limited life, closed-ended fund structure. Evergreen Funds have no fixed life, allowing managers to hold investments for longer periods of time, but also providing investors with some liquidity in the form of an allocation of liquid assets in the portfolio.
Private Equity clients will continue to participate in the growing trend of opening up access to private markets for retail investors, as they seek new sources of capital. This trend is expected to continue further in 2023, driving greater demand for transparency and information from investors. To support this, private markets are turning to the digitization of fund processes including onboarding, transaction capturing and data reporting. The ability to deploy technology solutions and remove the friction of traditional manual processes will be a key differentiator in the year ahead.”
Georges Archibald, Chief Innovation Officer & MD North America:
"In the Alternative Asset Management industry, democratization and transparency were the dominant themes of 2022 and were front of mind driving demand for solutions. Platforms and access products have continued to evolve, leveraging infrastructure including APIs and blockchain technology. Data capture has become more important than ever, forming the bedrock for meeting stakeholders' ever-present appetite for transparency and information. In 2023, we anticipate that a common language will prevail across stakeholders in the private markets, as products necessarily evolve to better accommodate and meet investor parameters. In order to deploy capital in a timely and efficient manner, digitization and investor onboarding processes and technology will be essential - especially in a fast-moving macroeconomic environment."
HP van Asselt, Global Head of Corporate Products & Growth:
“In 2023, businesses of all sizes are seeking efficiencies through consolidation of international entity management and governance. Increasing cross border regulatory, tax and legal complexities require guidance to funds, MNCs and SMEs by strategic partners. Providers are required to be at the heart of cross border growth of their clients. This, combined with increasing global transparency in structuring, augments reputational risks for businesses and executives resulting in higher demand for corporate governance, compliance and regulatory support. Although we will see a lower number of entities, this trend will be offset by higher volume in activities. Bank account opening services often form a bottleneck in international expansion activities and transactions, so those few providers with an in-house bank will have a strong competitive advantage. Value chain support services such as KYC and CDD as a service are more in demand, as well as HR and employee programs to keep talents satisfied with their employers.
With regards to Capital Markets, requests for data will further increase, driven by renewed regulatory focus (EMIR, SFDR) and investor demand. We expect a further increase in distressed assets following the inflation led market difficulties, offering opportunities for various capital market instruments. We expect to see increased M&A activity and demand for escrow arrangements as dry powder and pent-up pandemic demand for quality assets comes to market.
ESG accountability is finding its way through the global value chains now also in unregulated business areas (non-SFDR); resulting in higher demand for ESG monitoring and measurement going forward into 2023. Digital global governance and corporate secretarial support are increasingly important to secure adequate levels of ‘good corporate citizenship’, reduce compliance and administrative burdens.”
"2022 was yet another busy year for regulators worldwide, with ESG and digital assets leading the agenda. Whilst economies have begun adapting to a post-COVID world, inflationary trends coupled with chaotic financial markets have put the stability and need to protect investors at the centre of the purpose of many regulators around the globe.
In 2022, the US saw a significant number of proposed changes impacting the investment management industry. From major proposals to review the Investment Advisers Act of 1940 to potentially adding more Financial Institutions under the ENABLERS Act, changes to Form PF or even added outsourcing due diligence requirements, the regulators’ year was busy, and the extent of the changes being considered led to significant impacts in the US asset management industry.
With financial services adapting to the Sustainable Finance Disclosure Regulation (“SFDR”) and Taxonomy frameworks in the EU, and despite controversies such as the inclusion of certain gas and nuclear activities as green, we noted other key regulators jumped on the ESG bandwagon. Importantly, the UK recently introduced its Sustainability Disclosure Regime (“SDR”) proposals which illustrate the country’s divergence with the EU’s ESG framework. The US also put forward ESG related initiatives on disclosures and naming conventions in early 2022.
Crypto was a buzz word in 2022 - perhaps not for the best reasons - in light of the much-publicised downfalls of FTX and currencies such as Luna. A significant number of regulators and industry bodies put forward crypto-asset related regulations and frameworks, as illustrated by the EU’s Markets in Crypto Assets (“MiCA”) and Digital Operational Resilience Act (“DORA”) regulations, Singapore’s proposals on stablecoins and digital assets, the US’ Comprehensive Framework for Responsible Development of Digital Assets, the OECD’s Crypto-Asset Reporting Framework (CARF) proposals or consultations issued by the Financial Stability Board (FSB).
The trends of 2022 are expected to continue into 2023. With recessions looming for most economies in 2023, investment fund managers will need to strike a balance between ever increasing regulatory obligations whilst potentially facing cost pressures on their margins. This will likely create incentives to outsource compliance with such obligations to external providers and exploring ways to restructure or downsize operations to fit into leaner but also more operationally resilient models. Regulators are also expected to continue focusing on protecting retail investors, as recently illustrated by the UK Consumer Duty proposals coming into force in 2023, as many are expected to be impacted by turbulent financial markets and high inflation figures."
Andy Pitts-Tucker, Managing Director – ESG:
“If 2021 was the year in which ESG became mainstream, 2022 was characterized with a more thorough examination of its application to the financial services industry. Managers have become more cautious, nervous of being accused of "green" and "purpose-washing" their investment portfolios. Furthermore, the fear of regulatory non-compliance, and the specialist knowledge and understanding required to adhere to new rules, is driving many to seek external support. These factors have precipitated a dramatic shift over the last 12 months, from a reliance on unverified, in-house ESG data reporting to the need for independently evaluated and authenticated reporting, especially in areas such as carbon footprint calculation.
Companies have realised that taking short cuts when it comes to ESG reporting, will not cut the mustard or deliver meaningful outcomes. As a result, more investment managers than ever are outsourcing their ESG needs, as the complexities of data collection become clear, with many understanding that "marking their own homework" in this regard, will only invite further scrutiny.
We've been pleasantly surprised at the resilience of the ESG movement in recent months, even in the face of economic pressures and politicization of ESG from the US in particular. A continuing trend we have seen is the globalization of ESG - with non-EU investment managers seeking to "get ahead" of the future introduction of legislation, by aligning themselves with ESG best practice, despite there being no current regulatory obligation to do so.
In 2023, we expect managers to graduate from ESG reporting, to seeking solutions which help them to drive measurable, positive change. With the "E" and "G" of ESG now well understood, we expect the "S" considerations, such as Diversity, Equity and Inclusion (DEI) in the spotlight. Regulation will continue to drive adoption, becoming more mainstream across jurisdictions, and with SFDR Level 2 Reporting initiating increased disclosure requirements. Ultimately, as we have seen since the launch of Apex Group’s ESG solutions in 2019, this is an incredibly fast-moving market, as investor expectations on ESG performance and data are only growing while assets are still facing the same challenges.
Driven by investor pressure, regulators will continue to crack down on greenwashing – calling out the businesses which spend more effort marketing themselves as ESG-aligned, rather actually delivering positive impacts. We expect that multiple companies will incur millions in deserved greenwashing fines, which is an unfortunate outcome of firms not taking climate change seriously enough – but a necessary step for accountability and reinforcement of the need for robust ESG data collection and analysis.
2023 will also see the rise of “green-hushing”, whereby businesses and investors downplay their environmental credentials, to avoid attention and scrutiny from the media and regulators on other parts of their ESG profile. In many ways this could be as harmful and misleading for the industry as greenwashing has been in 2022.”
“2023 promises further advances in digital banking and financial technology which will continue to reshape the financial services landscape. While it can feel as though digital banking has become ubiquitous for consumers, there is still a great deal of room for further growth in the corporate and institutional world, and new technologies will be key to that.
In many industries, the race is on to embrace and harness the power of AI, and financial services are no exception. In fact, over 2023 and beyond, AI will become an essential part of the corporate digital banking industry. AI is already being applied to - and successfully solving for - a range of challenges that banking has traditionally faced. AI of course would be nothing without the data sets that feed and train it, and 2023 will see the digital banking sector continue to explore the possibilities unlocked by big data.
While blockchain in finance has been closely associated with cryptocurrencies, the technology is also having a big impact on the wider banking sector too. Over 2023, as more banks and financial institutions engage fully with blockchain technology, significant savings will be made on operating costs. Open Banking will further accelerate the digital payments revolution and the near future will see digital banks continue to adopt composable banking services and/or BaaS platforms to quickly set up their entities.”
Keith Miller, Global Head of Private Debt:
“In 2023, we expect to see a continued increase in allocation to private debt, as investors seek returns uncorrelated from turbulent market conditions. With the majority of private debt instruments benchmarked against a floating rate, the asset class continues to provide a level of protection in a market of increased inflation and privately negotiated covenants add some comfort in challenging macroeconomic times.
This demand for private debt comes at a time when bank lending and public markets continue to be restricted, and companies seeking to fund growth require alternative sources of capital. The trend for funds able to print larger tickets appears set to continue during 2023. Of course, distressed assets and special situations will also draw investor attention so opportunities will present themselves across the capital structure.
We know what our clients need and continue to provide support covering all aspects of debt administration from the borrower to the fund investor with greater integration into our clients’ processes and infrastructure a growing trend. With the position in the current credit cycle, underlying credit data gains enhanced focus from our clients so our front and middle office solutions are key to delivering efficiencies to our global client base.”
“As the pandemic related restrictions eased in 2022, we saw a move to greater international mobility of family offices as they sought to take advantage of new jurisdictions and new markets. This is set to continue as growth is necessary to keep up with the demands of the families as they too are growing larger as they pass from generation to generation. Many members have reviewed their personal circumstances and found that with the advance in technology they can work from anywhere, so this has also helped that drive.
We also see acceleration of generational moves of power as older generations who were considered a higher health risk have sought to transition and include the heirs more effectively in the business at a faster pace. This is really catching on in the Middle East with a lot of structures being put in place especially the use of foundations and charters. The Middle East has also sought to make significant amendments to law to support family businesses and succession planning.
Family offices are also showing growing interest and comfort with direct investing with the control it brings (including board positions) enabling active management, and the cost benefits that it provides. We expect this to continue in 2023. In the next year, we expect to see greater diversity of generations being served by the family office, resulting in more - and new - demands on the engagement model as the more sophisticated and faster pace has dictated the need for digital delivery so that instant access can be provided. The speed and extent of the bounce back in levels of migration for HNWI has been a surprise, and in 2023 we expect it will reach unprecedented levels. Keep a close eye on trends in the UAE and Singapore which have seen extraordinary numbers of families establishing (or redomiciling) their family offices in these jurisdictions.
ESG has notably matured as an investment theme, however, like many other investor types - family offices are wary of investment “greenwashing”, they understand their resources can make a difference and still generate strong returns. This is no longer a nice to have but a necessary demand that has to be met. The next generation in family offices are keen to be seen as acting beneficially for others and the planet and hence want to ensure that their investments are in line with their values while also generating returns."
Natalie Breen, Global Head of Strategic Development – Real Assets:
“Despite the real estate sector having had a positive start to 2022, rising interest rates, and the high inflationary environment saw market conditions deteriorate over the course of the year. Consequently, we saw a slowdown in the raising and deployment of capital in the real estate sector in the final quarter of 2022, as many investors 'paused' pending more clarity around market conditions and asset valuations. However, it is not all negative and history has shown us before that during these downturn cycles there are also opportunities for those investors who are well capitalised and can take advantage of opportunities generated by market dislocation.
Not all investors have "paused" and we expect to see the large global players still execute fund launches in core markets and sectors. We also anticipate the non-bank lenders will be very active during this constrained debt liquidity environment, as the traditional banks retreat, resulting in new private debt funds being launched.
Many of our clients are using this period of low transactional activity to implement strategic projects to future proof their business, such as digitalisation and ESG reporting. There is also a general focus by clients on increasing operational efficiency, whether via digitalisation or increased outsourcing of non-core functions.
While 2023 may be off to a slow start, so far as capital raising and fund launches are concerned, we expect the US, UK and European economies to start showing signs of recovery as the year progresses. This coupled with the re-opening of China and the weight of global capital yet to be deployed, we anticipate that the real estate sector will be in a very different place as we close out the year.”
“Despite global economic headwinds, Africa’s private and venture capital markets are continuing to recover from the COVID-19 pandemic, giving reasons for optimism in 2023.
The African Private Equity and Venture Capital Association’s half year report showed that both the volume and value of private capital deals in Africa rose significantly year on year, with 338 private market deals worth $4.7bn being successfully concluded in H1 2022. In line with global trends, during the final quarter of last year the amount of capital raised for new funds slowed, suggesting that the continent is not immune to some of the issues affecting global markets.
The outlook for Africa’s private capital markets in 2023 is more positive than at any time since the global pandemic. The resilience of the industry and remarkable bounce back in deal making and fundraising activity has surprised on the upside. To support this growth in 2023 and beyond, Apex Group is well positioned with respect to our global reach and innovative solutions, delivered locally and underpinned by the latest technology.”
“In Luxembourg, our clients spent much of 2022 navigating the lingering impacts of the pandemic and adapting their processes, structures and approaches accordingly. In terms of asset classes and strategies, structured products and more specific strategies within supply chain finance have performed well. In the second half of 2022, asset managers had to further adapt and position their businesses for the looming geopolitical and inflationary pressures and impacts.
In 2023, the regulatory agenda will have a significant impact on how our clients do business, including new SFDR compliance and reporting requirements, PRIIPS and a renewed focus on AML/CFT. With the regulatory and compliance requirements continuing to rise, we anticipate growing demand for third party management company (“ManCo”) services in jurisdictions like Luxembourg to help alleviate some of this burden. Asset managers are continuing to see the benefit of the flexible, additional resources provided by a third-party ManCo, allowing them to concentrate on their core mandate of generating returns for their investors. Following the acquisitions of Sanne Group and Maitland in 2022, Apex Group - and our Super ManCo subsidiary FundRock - are well positioned to meet this growing demand.
This year, our clients will remain focused on improving and streamlining communication with their investors, as well as adding the required resource to meet the growing regulatory, compliance and administrative burden placed on their businesses. In the challenging macroeconomic environment, asset managers are continuing to seek out cost efficiencies. Themes we have seen in recent years such as ESG, the democratization of private assets and the growing demand for new structures including semi-opened-ended alternative funds, will persist in 2023. Luxembourg will further strengthen its position as a leading funds domicile, attracting managers with its strong track record, a supportive, innovative and robust regulator, matched with a mature financial services ecosystem. We see no signs of growth in the ManCo sector slowing, with the Grand Duchy offering a compelling environment in which fund managers can seek knowledgeable support to drive the success of their business.”
Akshay Thakurdesai, Country Head, India:
“Last year the Indian economy was influenced by strong macroeconomic headwinds arising from higher USA interest rate movements, global inflationary pressures and geopolitical issues. This caused a slowdown in certain sectors such as tech. Nevertheless, the Indian economy was one of the standout outperformers providing substantial growth.
Despite aggressive selling by foreign investors, the domestic investors propped up the Indian market in 2022 and are expected to remain so in 2023. Apex Group expects the public equity markets, FDI and FPI to remain buoyant as inflation and downturn fears in the developed markets are less than expected. Regulators have been prudent and indeed progressive in many aspects with interesting developments such as the ODI regulations to the fore. Corporate activity (both domestic and international) is expected to grow substantially with company formation, structures, fund raising all being positive and rising. For the Asset Management sector: Public Equity Funds, Hedge Funds, Distressed Asset Funds are all expected to do well in capital raising, distribution and investment opportunities although cost pressures will remain. Alternative Funds have and will continue to see challenges in fund raising since many of the foreign and domestic investors have de-risked away from alternatives into real assets. Their portfolio company valuations (which are mostly in the tech and crypto sector) have been substantially impacted negatively and we expect subdued activity in this area for the first half of 2023. Family wealth will increase significantly, with the movement of capital out of India expected to increase by several orders of magnitude coming from the growth of the Indian economy, ODI regulations, availability of reasonably priced assets across the world.”
"The MENA region had a good 2022 generally due to their currencies being pegged to the USD Dollar, higher oil prices and strong domestic demand. GCC countries should expect the GDP growth to almost double in 2023 to around 6.5%. Unlike prior episodes of sustained high oil prices, the oil producing nations have kept their public sector expenditures in check and ensuring that their fiscal surplus is bolstered for future dry powder. Efforts to further diversify the economy, improving ease of doing business, focusing on inward investments, improving productivity, public health efforts have increased substantially.
The region has also seen an influx of investors who are looking for investment opportunities, helped by supportive government and regulatory policy – this is expected to continue in 2023. The non-oil economic sector is one of the highlights – real estate, consumer goods, manufacturing, services all showing improvement. The fiscal market liquidity squeeze seen in some economies will ease as the deposit and lending ratios improve. Hence corporate activity (both domestic, inbound, outbound) is expected to sharply increase. COP28 in the UAE is expected to provide a boost to the greening of the economy and provide more financing to green transition efforts. Talent is an issue although the open immigration policies are expected to mitigate this issue to some extent. Fund raising will continue to be an issue globally although the number/type/sector of funds (public, alternative, debt, real estate) funds is expected to sharply increase. Not just domestic fund setup, but also migration of fund managers from other jurisdictions. 2023 will see private wealth flooding into the region, with a growing number of entrants from Russia, Europe, Chinese, SE Asia who have traditionally not seen the MENA region as a residency or investment opportunity.”