McKinsey on Investing Number 1, Winter 2014/15 5 17 36 51 68 The $64 trillion An interview Money isn’t From indexes to Uncovering hidden question: with Douglas Hodge everything (but we insights: The rise of investment Convergence in asset of PIMCO need $57 trillion for thematic investing opportunities in management infrastructure) Africa 23 57 12 Changing perceptions 40 What overachieving 70 A conversation with and new realities Private equity in institutional Private-equity Edward Bonham in private equity India: Once investors get right operations: Inside Carter of Jupiter overestimated, the black box Asset Management 30 now underserved 61 A conversation with Investing for the Jim Coulter of TPG long term McKinsey on Investing is written by Editor: Mark Staples Copyright © 2014 McKinsey & Company. experts and practitioners in McKinsey’s Art Direction and Design: All rights reserved. global investor-focused practices, Leff Communications including our Private Equity & Principal Managing Editors: Michael T. Borruso, This publication is not intended Investors, Wealth & Asset Management, Venetia Simcock to be used as the basis for trading in and Infrastructure Practices. Editorial Production: the shares of any company or Runa Arora, Elizabeth Brown, Heather for undertaking any other complex or To send comments or request copies, Byer, Torea Frey, Shahnaz Islam, significant financial transaction e-mail us: [email protected] Katya Petriwsky, John C. Sanchez, without consulting appropriate Sneha Vats professional advisers. Editorial Board: Bryce Klempner (lead), Sacha Ghai, Martin Huber, Conor Kehoe, Cover illustration by Jon Krause No part of this publication may be Robert Palter, Alex Panas, Vivek Pandit, copied or redistributed in any Gary Pinkus, Mark Staples, Felix Wenger McKinsey Practice Publications form without the prior written consent Editor-in-Chief: Lucia Rahilly of McKinsey & Company. Special thanks to Ethan Ard, Jennifer Executive Editors: Allan Gold, Arnold, Nick Bawa, John Gwin, Bill Javetski, Mark Staples Wendy Lee, and Jenny Wong for their contributions to this volume. 1 McKinsey on Investing Number 1, Winter 2014/15 Alternative asset Institutional Asset management management investing Research in brief 2 5 23 51 68 Introduction The $64 trillion Changing perceptions From indexes to Uncovering hidden question: and new realities in insights: The rise of investment Convergence in asset private equity thematic investing opportunities in Africa management Industry performance Leading institutions say Recent research on the Traditional asset is better than previously this new approach can African private-equity managers and alternatives thought, but success deliver better performance market reveals a mismatch specialists are eagerly is getting harder to repeat. over the long term than between supply and contending for an outsize Investors and firms will their traditional methods. demand for financing that share of a rapidly need to adapt to changing Here’s how they’re putting could point to investment growing industry. conditions. it in place. opportunities. 30 57 12 70 A conversation with What overachieving A new era for asset Private-equity Jim Coulter institutional investors management: operations: get right A conversation with The veteran investor Inside the black box Edward Bonham Carter discusses alternative No single practice or Initiatives to accelerate assets, shifting currents behavior explains success. A leading manager growth are a priority; within the industry, Instead, top investors shares his views on an cost cutting is seen as a and how management fees work across five industry undergoing commodity skill. profound change. are like a two-by-four. dimensions to achieve excellence. 17 36 Thriving in a world Money isn’t 61 of low and flat: everything (but we Investing for the An interview with need $57 trillion for long term infrastructure) Douglas Hodge Dominic Barton, The head of the world’s A massive funding gap will McKinsey’s global largest fixed-income open in coming years. managing director, and manager discusses the New research shows how Mark Wiseman, president industry’s past, present, to close part of it. and CEO of Canada’s and future. largest pension fund, 40 explain why big investors Private equity in India: are crucial to ending the Once overestimated, plague of short-termism. now underserved General partners can use lessons from the past decade to build a new and better future. 2 McKinsey on Investing Number 1, Winter 2014/15 Introduction Welcome to the inaugural issue of McKinsey on Investing, created to share new ideas about the business of investing with professional asset managers and institutional investors. We have conferred with colleagues in our offices around the world to assemble the best of our recent research and thinking. And we have been fortunate to speak with three leading voices: Edward Bonham Carter of Jupiter Asset Management, Jim Coulter of TPG, and Douglas Hodge of PIMCO. We hope that this combination of perspectives will spark ideas and advance dialogue on the industry. Investing matters. About 40 percent of the world’s capital, some $64 trillion, is under professional management, and that number is growing fast as financial markets mature around the world. McKinsey on Investing is intended to capture our perspectives on this industry. Our focus thus extends from institutional investors— pension funds, sovereign-wealth firms, endowments, family offices, and others—to the diverse entities that have arisen to serve these institutions, including both traditional asset-management firms and managers of “alternative investments” (a moniker that’s more ubiquitous than accurate today). Within alternatives, we consider the increasingly overlapping realms of private equity, hedge funds, infrastructure, real estate, and other asset classes beyond stocks and bonds. The lines that have historically separated these worlds—general partner and limited partner, traditional and alternative, institutional and retail—are rapidly blurring. Limited partners are investing directly. Asset managers are entering alternatives, while private-equity firms and hedge funds are eyeing the infrastructure, retail customer base, and public-market multiples of the asset-management giants. Retail 3 investors are moving into asset classes and investment vehicles traditionally restricted to institutions. And so on. The people, tools, and approaches we deploy in advising each of these types of players are intersecting more and more. It is only natural that we share our perspectives on these converging worlds in an integrated manner. Old habits die hard, however, so for simplicity we have grouped these articles in four traditional categories. First, we present three points of view on asset management. We then offer a variety of perspectives on alternative asset management, the fastest-growing corner of the industry. Three articles detailing the pursuit of excellence and long-term objectives in institutional investing follow. We conclude with quick research summaries of two recent efforts in the private-equity space. We hope you enjoy these articles and find in them ideas worthy of your consideration. Let us know if we’re hitting the target—or if we’re wide of the mark. You can also view these articles and many others at mckinsey.com. Bryce Klempner 4 McKinsey on Investing Number 1, Winter 2014/15 Asset management Neil Webb 5 12 17 The $64 trillion A new era for asset Thriving in a world question: management: of low and flat: Convergence in A conversation An interview with asset management with Edward Douglas Hodge Bonham Carter Pooneh Baghai, Martin Huber Onur Erzan, Martin Huber and Ju-Hon Kwek 5 The $64 trillion question: Convergence in asset management Traditional asset managers and alternatives specialists are eagerly contending for an outsize share of a rapidly growing industry. Pooneh Baghai, The boom in alternative investments presents will run out of steam. However, our new research Onur Erzan, something of a paradox. On one hand, money has clearly indicates that the boom is far from and Ju-Hon Kwek continued to pour into alternatives over the past over. In fact, it has much more room to run. In three years. Assets hit a record high of $7.2 trillion late 2013 and early 2014, we surveyed nearly in 2013.1 The category has now doubled in size 300 institutional investors managing $2.7 trillion since 2005, with global assets under management in total assets and conducted more than 50 inter- (AUM) growing at an annualized pace of 10.7 per- views with a cross section of investors by size and cent—twice the rate of traditional investments type. The vast majority of institutional inves- (Exhibit 1). New flows into alternatives were tors intend to either maintain or increase their 6 percent of total assets in 2013, dwarfing the 1 to allocations to alternatives over the next three 2 percent rate of nonalternatives. Every alterna- years. Interest is especially keen among large and tive asset grew, especially direct hedge funds, real small pension funds (though not midsize funds) assets, and retail alternatives sold through and sovereign-wealth funds. Wealthy individuals registered vehicles like mutual funds and exchange- are also moving rapidly into the market, as traded funds (ETFs). Even private equity, new product vehicles provide unprecedented where assets retreated from pre-crisis highs, has access to retail investors. Flows from each of bounced back in its new fund-raising. these four groups could