Financial services industry outlooks 2024

Peter Hughes, Founder and CEO of Apex Group

As we embark on 2024, we embrace the digital transformation and automation of our processes to be the fastest innovator in our industry. Regulatory changes, especially those related to operational resilience, are constantly evolving in different regions and we expect this to continue. Agility is essential to adapt to these changes and thrive in our dynamic environment. Our recent strategic lead investment in Tokeny, an enterprise-grade tokenisation solutions provider, solidifies our dedication to driving the digital revolution of the financial industry. By leveraging Tokeny’s expertise, we are able to offer our unique single-source solution for tokenisation and spearhead the digital revolution of finance.

Our clients show great interest in our connected approach to technology - linking their data from investment to investor. To leverage our global connectivity and experience to create value for our clients, the Apex Invest platform and flagship events provide a powerful capital-raising solution that empowers both fund managers and allocators to build connections and identify investment opportunities.                              

We continue to observe investor demands for greater liquidity in private market assets, and we have focused on solutions that deliver this in 2023. The trend towards Hybrid funds and more evergreen structures reflects this shift. The ability to adapt to emerging opportunities will remain a key factor for investment success in 2024.

Valerie Mantot- Groene, Regional Managing Director- ASEAN

Early 2024 will be defined by the continuation of several trends which dominated the second half of 2023. On the macroeconomic front, high interest rates, geopolitical uncertainty, and economic malaise have all weighed on the asset management industry. Market volatility also impacted fund performance in 2023 and fundraising challenges have impacted the launch of new funds. A lack of exit and M&A opportunities is also impacting on the transactions' volume and availability of liquidity. All of this has been further compounded by a talent crunch across the asset management and asset servicing industry.

In terms of fund preference trends, Private Credit and Real Estate have recently proven the most popular asset classes, with Venture Capital being less popular. Japan, South Korea, Australia, and Vietnam have been the main beneficiaries of investments allocations. in 2024, Private Credit and Real Estate will remain the most popular assets classes and Japan, South Korea, Australia, and Vietnam will continue to be the main beneficiaries of investments allocations.

We have also seen a preference emerge for institutional limited partner funds with solid track records to allocate capital to asset managers. Co-investments fund structures and direct investment type structures are also growing in popularity. Another trend we expect to see continuing in 2024 is toward the outsourcing of operation and finance functions for cost efficiency and resource management purposes.

2024 will see fundraising challenges continue to impact start up managers. More positively however, given the growing pressure following 2023, we are likely to see a pick-up in exit and M&A activity, specifically in private equity. We will also see an increase in innovative structures and programs to facilitate the occurrence of liquidity events and access to liquidity. With tighter margins abounding, there will be a push towards operational and cost efficiency and through automation and outsourcing.

The new year will also see direct allocation by institutional LPs increasing, greater levels of activity on secondary markets (at LP level and Asset level) and onshoring of structures to Hong Kong and Singapore and consolidation of a number of structures for deals and investments.

Emma Bickerstaffe, Managing Director, ESG & Sustainability

Environmental, social and governance (“ESG”) regulation was firmly in the spotlight in the second half of 2023 as the political debate surrounding ESG continued. In US markets predominantly, the consideration of ESG factors in investment decision making faced scrutiny with some questioning whether the approach was driven by a political agenda rather than financial performance and whether in fact it negatively impacted investor returns, hindered the wider economy, and discouraged innovation and growth. In Europe the first Sustainable Finance Disclosure Regulation (“SFDR”) periodic disclosure landed which shone a light on the challenges and effectiveness of the regulation which has triggered a broad review and led to a similar ESG backlash in Europe. Coupled with this we saw new ESG related regulation land, particularly in the UK and European markets, the most notable being the UK Sustainability Disclosure Requirements (“SDR”) and the EU’s Corporate Sustainability Reporting Directive (“CSRD”). This has undoubtedly resulted in regulatory demands taking over from investor pressure as the main driver for action for many firms and has resulted in greater demand for Apex ESG regulatory services.  

In H1 2024, we expect an increased focus on carbon and climate commitments, with much welcome challenges on scope, level of detail, and quality expectations. We expect this to result in demand for the Apex carbon services including measurement, verification, and reduction planning. CSRD will become a reality for many large corporates as they frantically decide how to ready themselves for reporting in 2025 – these activities will include training, double materiality assessments, and an understanding of gaps they need to address in order to complete the reporting templates in future. After 18 months of depressed M&A activity we also expect an increase in H1 2024. This will be driven by significant dry powder in private equity funds that needs to be invested, and the need for these funds to assess existing portfolio investments to return capital to LPs. From an ESG standpoint we expect this to result in an uptick in due diligence activity, and greater focus on pre-exit sustainability plans.

Elaine Chim, Global Head of Closed Products

2023 brought a host of macroeconomic challenges which meant that the ability of service providers to support clients in changing and sometimes unprecedented situations was more important than ever.  More than ever our solution-oriented approach and global footprint has helped our clients rise to these challenges.

For LPs, interest rates, the exit environment and valuations have been key concerns. GPs have felt the reality of the denominator effect in allocation decisions, especially for large players. Fundraising remained subdued throughout 2023, with many investors, in particular those facing liquidity pressures, choosing public market exposure at the expense of private.

The new challenges posed by macro-conditions have prompted managers and allocators to become more innovative, which we think will continue to prevail in 2024. With liquidity concerns at the forefront, we have seen a rise in GP-led secondaries and a blurring in the delineation between closed ended and open ended, for example with the European Long-Term Investment Funds. Our unique expertise across both liquid and illiquid funds and command of the tools and platforms applicable to each position us in a unique way to seize this opportunity. 

Faced with extended hold periods for the portfolio companies, PE sponsors are focusing on ways to manage working capital more efficiently and cut operational costs. Outsourcing and co-sourcing are great opportunities for Apex to bring to life solutions tailored to clients’ needs and be part of their growth at scale.

Regulatory changes, such as the Securities and Exchange Commission (“SEC”) rules on private funds or the continued instituting of ESG principles in Europe, are opportunities for us to broaden our service scope as we continue to look for new solutions for clients. Global trends such as the widening accessibility of private markets have been apparent in the rise of the digital funds asset class. Again, we have been at the forefront of the change and will continue to do so in 2024.

Marie Measures, Chief Digital Information Officer

2023 has been about navigating a rapidly evolving landscape shaped by several key trends.  The first is the increasingly global nature of our industry. This means that funds and investment structures are increasingly operating across multiple jurisdictions. As a result, fund administrators need a scalable global platform with a presence in all jurisdictions. This need has been a major part of our technology strategy, leading us to create a global platform with automated processes to ensure excellent client service.

The emergence of new asset classes and investment structures is also driving technological innovation. These changes are contributing to a significant shift in fund administration. As a result, we’re seeing an increased use of artificial intelligence to streamline processes and blockchain to improve record-keeping. These technologies are becoming integral to our industry.

Data management is crucial when building AI-enabled technology solutions. In 2023, we focused on improving our data governance and information security capabilities. We’ve matured our data platform and strengthened our cyber provisions in response to market demands and regulatory changes.

Looking ahead to 2024, we expect these trends to continue shaping our future. The digital transformation of processes and increased automation are critical for the industry’s future success. Regulatory changes, particularly those focusing on operational resilience, are ongoing across many jurisdictions. We’re prepared to adapt to these changes and develop plans to respond to an ever-changing landscape.

We plan to continue investing in artificial intelligence, which will drive further transformation in data and cyber security. The accessibility of generative AI in mainstream tools like Microsoft 365 will benefit our entire staff. It will also enable Apex to continue developing client services and creating new technology products.

In conclusion, the future of fund administration involves continued technological advancement and adoption. The key message for 2023 and 2024 is clear: the market must innovate or risk falling behind.

Melville Rodrigues, Head of Real Assets Advisory

In 2024, the strategic goals for UK real estate fund managers are to enhance operational efficiency and advance sustainable objectives.

Given the prospects of continuing stagnant capital growth, reflective of high interest rates, fund managers looking to generate value for customers in 2024 will need to focus on income return and operational efficiency will be key to this. Interest rates set by the Bank of England (“the Bank”) will remain at or about current levels given the Bank’s understandable focus on controlling inflection. The latest inflation forecasts from the Office for Budget Responsibility (“OBR”) and the Bank are gloomy. The OBR predicts 2.8% by the end of 2024 with 2% towards the middle of 2025. The Bank is gloomier, 3.4% consumer prices inflation by end 2024, and 2.2% at the end of 2025.

Obviously, income return can be enhanced with more efficient operational costs. So, as fund managers compete for efficiency, costs throughout the fund management chain will be even more in the spotlight.

In the context of operating more efficiently and raising capital, we hope fund managers will have the opportunity from April 2024 to launch (or convert certain funds) to a new UK fund structure, the Reserved Investor Fund (“RIF”). The RIF legislative progress this year will see two highlights. In June an entity established under the Financial Services and Markets Act 2023 and in November, the FCA will confirm that “the Government is progressing work on proposals on the establishment of [the RIF]”.  The RIF will make it easier for closed-ended or hybrid structure market closed-ended or hybrid structures to get to market, dispensing the need for UK managers to domicile such funds offshore. Managers should consider using the RIF in view of Government feedback on its RIF tax-related consultation. 

Accelerating sustainability goals

According to the UK Green Building Council, the built environment “contributes 25% of the UK’s total carbon footprint” and “our buildings, towns, cities and infrastructure have a clear role to play in enabling the UK to achieve its climate commitments to reduce emissions by 78% by 2035 and achieve net zero by 2050” (UKGBC 2023).

There is a growing investor popularity for sustainable real estate funds. Fund managers must embrace the Sustainability Disclosure Requirements (“SDR”) issued by the FCA in November. (FCA 2023). This new regime establishes disclosure rules to govern the way in which funds may be marketed with regard to their sustainable or impact credentials: labels pivoted on sustainability focus, improvers, impact, or a mixture of these goals. Fund managers can begin using the labels from July 2024, with disclosures 12 months after the label is first used. From December 2024 detailed on-demand disclosures should be provided to investors.

Managers must become familiar with, and prepare for, SDR. Our real estate sector must reduce greenhouse gas emissions - each of Scopes 1, 2 and 3 (UKGBC 2023) from fund promotion through to fund structuring and reporting. This importantly connects back to, and reinforces the importance of, operational efficiency.