Market Changes: Platform Rationalization and Replacement Searches

By: Superior Hiking

The world has changed, and the investment management landscape has changed along with it. While the 2000s were spent by organizations building out extensive and diversified platforms of investment options, the 2010s have been spent unwinding them. Easiest to unwind is liquid and separately managed account structures, but private equity, venture and limited partnership investments have not been immune to these trends. Whether institutions run their own platform, or outsource to an entity that focuses on investment manager selection and monitoring in the form of consulting or a dedicated platform, manager rosters are robust. Over the past several years, platforms have gone through an ongoing rationalization process of shaving down their inventory of offerings. With an increase in regulation and strong momentum behind the major indices, platforms have sought to reduce their offerings in order to maintain a more efficient solution set. By reducing the quantity of managers, institutions save costs. Platforms can be managed with far fewer resources.

The market cycle has only supported this trend. With passive management largely outperforming active across asset classes, institutions and their investors have further rationalized that passive provides the best cost/benefit equation in certain asset classes. The result is a reduction in active management opportunities and far fewer new allocations. Managers are largely reliant on replacement searches, opportunities in which institutions determine they must replace a manager due to size (it has grown too large or too small), performance or other investment management or firm changes the institution is not comfortable with. Platform realizations and a focus on replacements as the primary search rationale has changed the landscape for investment managers seeking to grow institutional market share. Even in the case of liquid products, and those at the other end of the spectrum with long-term holding periods such as private equity, venture and some limited partnerships, manager rosters are on the decline. Institutions of all shapes and sizes are simplifying and downsizing their manager rosters. Re-upping on subsequent offerings from the same manager is down and investing in early stage funds is on the decline. While these trends will surely shift, the days of readily available capital and limited due diligence are unlikely to return. Where does this leave managers? Business owners must carefully consider channel trends and prospect viability, seeking to rule out unlikely prospects as early in the process as possible. Managers should also consider managing their capital commitment in regards to budget In light of these trends, ensuring that they can stay the course through a 2-3 year timeframe to permit sufficient time to uncover appropriate prospects and to be ‘In the que’ when these replacement searches occur. Understanding the reality of the Institutional market Is half the battle; understanding permits managers to plan and to prepare for the inevitable timeframes Inherent In Institutional business development.