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June 20, 2024
PI Global Investments
Alternative Investments

A New Focus on Costs in Alternative Asset Management

Although attention to costs isn’t new for some firms, during the long boom the industry as a whole was more focused on enabling growth. Today, while managers may be starting from different points, most have clear opportunities to improve efficiency. Some steps—such as centralizing, relocating, and perhaps outsourcing company-wide functions—are familiar but still underused in alternative asset management. Other steps entail being an early mover, especially in artificial intelligence (AI), with its potential for major productivity improvements across a firm.

As with all transformative initiatives, moving ahead requires committed leadership and careful planning using a proven change management playbook. But the work is worth doing: along with wider profit margins, the result will be an infrastructure that is better prepared to support further growth when the cycle turns.

Peer Comparisons

The first step is building a detailed view of the cost structure that supports the firm’s activities in both the front and the back office. Costs need to be viewed on both an absolute basis and, crucially, relative to the firm’s peers. Comparing the organization to competitors with similar profiles will yield key insights about how the organic expansion of recent years has shaped its cost structure and how it could be improved. The industry context can help the firm’s leaders adjust the company vision as needed and build the case for it among employees.

Costs need to be viewed on both an absolute basis and, crucially, relative to the firm’s peers.

With the initial cost analysis in hand, a manager can consider which levers are available for improvement and evaluate their suitability for its business model and culture. Our research finds that six best practices across the industry stand out: centralizing support functions, leveraging lower-cost locations, outsourcing support functions, deploying support staff more effectively, sizing investment teams in line with potential returns, and harnessing AI tools.

Centralizing Support Functions. Few firms need to be sold on the benefits of centralized support functions. Centralization brings global consistency and economies of scale and sets the stage for further efficiencies. Even so, some managers are more siloed than they should be, often because they’ve added new geographies or asset classes in recent years. Companies such as Blackstone, by contrast, have achieved 80% to 90% centralization in fund operations and information technology while keeping functions like portfolio operations and value creation strategically decentralized.

Leveraging Lower-Cost Locations. Most first- and second-tier firms operate in multiple regions, giving them choices about where to base centralized support functions. Costs, especially for personnel, already play a role in these decisions, and they take on additional importance during a down cycle. Lower-cost locations can be within one of the organization’s major markets (as when a New York firm puts its technology hub in Atlanta) or further afield (if it locates back-office facilities in Manila or Gurgaon). Sometimes a lower-cost location is home to a full range of firm activities—as is the case for Partners Group’s US headquarters near Denver—but more often it is chosen to control costs in one or more functions.

The lower-cost location lever is especially useful in fund operations and technology, as demonstrated by three prominent managers (Blackstone, KKR, and Partners Group) for which relevant data is available. (See Exhibit 2.) Not coincidentally, these functions are the ones most characterized by routine processes that can be standardized, making it easier to perform them across time zones, languages, and cultures.

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