The European fund management industry is at a critical juncture. As another wave of substantial regulatory change is imminent, the operational landscape is rapidly transforming in response to technological innovation, market shifts, fierce competition, cost optimisation and the scarcity of capital and talent. Gold plating and market entry barriers are coming on top.
For many European fund managers, navigating this complexity has become a core part of their value proposition, demanding both organisational and strategic agility.
Headwinds: A challenging regulatory landscape
Across Europe, new regulations are further burdening the industry. Notably, the Sustainable Finance Disclosure Regulation (SFDR), the European Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), Alternative Investment Fund Managers Directive (AIFMD) 2.0 and, in the UK, the Consumer Duty, and the upcoming UK Sustainability Disclosure Requirements (SDR).
In the US, the Securities and Exchange Commission (SEC) has been pursuing a proactive regulatory agenda, focused significantly on private fund advisor regulations and enhanced environmental, social and governance (ESG) disclosure requirements.
However, recent court rulings have blocked some of these efforts, specifically also regarding the SEC's attempt to impose stricter disclosure rules. Nonetheless, many market players expect the SEC to reintroduce these regulations, with modifications to address the court's concerns.
The complex regulatory environment is particularly onerous for smaller players and is a significant driver of market consolidation, which may accelerate as the regulatory compliance burden and fundraising challenges persist and converge.
Market uncertainty and its ripple effects
Current market uncertainty is exerting downward pressure on fees and creating a challenging fundraising environment. Private equity fund managers are facing a tepid exit market for their investments, resulting in an ageing pool of assets and delaying the return of investor capital. This is fuelling investor reticence, driving further scrutiny and postponing reinvestment.
Adding to these pressures, investors and regulators are demanding greater transparency from fund managers regarding investment strategies and fees. This necessitates robust disclosure practices and adherence to evolving regulatory requirements on transparency.
Furthermore, there is growing pressure from investors and the public for firms to surpass mere ESG disclosures. Stakeholders increasingly expect investment managers to demonstrate real impact in areas such as climate change and social responsibility. This shift from disclosure compliance to proactive impact generation is becoming a defining trend.
Tailwinds: Embracing innovation for growth
Despite the headwinds, technological advancements offer a silver lining. Artificial Intelligence (AI), big data, and RegTech solutions can significantly improve efficiency, enhance decision-making accuracy, and strengthen risk management capabilities for fund managers.
The investment management industry was an early adopter of machine learning and AI technologies. Many advanced business applications of this technology are already in use within the fund management industry today, particularly in investment automation and pattern analysis.
At the same time, RegTech, FinTech and AI-powered solutions require careful handling, demanding time and additional resources. While technology offers solutions, they must still align with the legal and regulatory environment, which remains somewhat fragmented globally, necessitating a global approach and careful navigation by firms.
Furthermore, the introduction of new regulations such as the EU's Digital Operational Resilience Act (DORA) underscores the need for managers to not only innovate but ensure their digital infrastructures meet regulatory standards aimed at maintaining operational continuity and security across financial services.
Conclusion
The European investment management industry is navigating a period of transformation. While regulatory and market challenges abound, the future of investment management lies in effectively managing this complexity.
Those who can adapt to the ever-evolving regulatory environment, responsibly embrace technology, and identify emerging opportunities will be the ones who succeed.
Catherine Pogorzelski is international sector head of investment management and funds at DLA Piper. The views expressed above should not be taken as investment advice.