Key Takeaways
- • Boston Consulting Group argues that alternative asset managers should revisit cost structures built during the decade-long growth boom, as rising interest rates and macro uncertainty weighed on 2022 earnings and expense management featured in first-quarter 2023 earnings calls.
- • BCG identifies six industry best practices for cost control: 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.
- • Blackstone has reached 80% to 90% centralization in fund operations and information technology while keeping portfolio operations and value creation decentralized, according to BCG.
- • One unnamed global manager reported a 200%-plus improvement in support-function efficiency, measured by fee-bearing AUM per non-investment employee, as its fee-bearing AUM grew from about $150 billion to about $560 billion between 2012 and 2021.
- • BCG cites a realistic goal of a 5% profit margin improvement for most managers and says the current slowdown is an ideal time to pursue it.
Summary
Boston Consulting Group (BCG) contends that alternative asset managers, after a decade of record growth and profitability, should reassess the cost structures they built to support expansion. According to the firm, rising interest rates and macroeconomic uncertainty took a major toll on 2022 earnings, and expense management was one of the key themes in first-quarter 2023 earnings calls. BCG notes that while cost focus has long been a priority for some firms, the industry as a whole concentrated on enabling growth during the long boom.
BCG recommends beginning with a detailed view of the cost base across front and back offices, measured both in absolute terms and relative to comparable peers. The firm's research identifies six practices it considers stand out across the industry. Centralization offers global consistency and economies of scale, and BCG says Blackstone has achieved 80% to 90% centralization in fund operations and information technology. Lower-cost locations, such as Atlanta, Manila, or Gurgaon, are particularly effective for fund operations and technology, which BCG describes as routine functions that are easier to standardize. BCG cites Blackstone, KKR, and Partners Group as examples, and notes Partners Group's US headquarters near Denver.
Outsourcing support functions can extend these gains but requires stronger standardization, interaction tools, and clearly defined roles. BCG describes one global manager that centralized information technology and fund administration in outsourced "centers of excellence," a key driver of a 200%-plus improvement in support-function efficiency. BCG also argues that staffing mix should be tailored to business goals rather than aligned with industry medians, citing cloud migration as an example of a justified temporary technology concentration, and that firms with early automation investments employ technology teams roughly half the size of fourth-quartile peers. Investment team sizing should reflect strategy, with credit requiring less hands-on management than private equity and value-creation strategies such as roll-ups needing larger teams than recapitalizations.
BCG characterizes AI as an adaptable productivity engine rather than a single lever, though it acknowledges the efficiency gains are not yet quantifiable. Potential applications include fund operations, accounting, legal, marketing, investment due diligence, and identification of investment themes and targets. The firm concludes that execution, including employee buy-in and tracking progress, is the harder challenge, and that a 5% profit margin improvement is realistic in most cases.
BCG recommends beginning with a detailed view of the cost base across front and back offices, measured both in absolute terms and relative to comparable peers. The firm's research identifies six practices it considers stand out across the industry. Centralization offers global consistency and economies of scale, and BCG says Blackstone has achieved 80% to 90% centralization in fund operations and information technology. Lower-cost locations, such as Atlanta, Manila, or Gurgaon, are particularly effective for fund operations and technology, which BCG describes as routine functions that are easier to standardize. BCG cites Blackstone, KKR, and Partners Group as examples, and notes Partners Group's US headquarters near Denver.
Outsourcing support functions can extend these gains but requires stronger standardization, interaction tools, and clearly defined roles. BCG describes one global manager that centralized information technology and fund administration in outsourced "centers of excellence," a key driver of a 200%-plus improvement in support-function efficiency. BCG also argues that staffing mix should be tailored to business goals rather than aligned with industry medians, citing cloud migration as an example of a justified temporary technology concentration, and that firms with early automation investments employ technology teams roughly half the size of fourth-quartile peers. Investment team sizing should reflect strategy, with credit requiring less hands-on management than private equity and value-creation strategies such as roll-ups needing larger teams than recapitalizations.
BCG characterizes AI as an adaptable productivity engine rather than a single lever, though it acknowledges the efficiency gains are not yet quantifiable. Potential applications include fund operations, accounting, legal, marketing, investment due diligence, and identification of investment themes and targets. The firm concludes that execution, including employee buy-in and tracking progress, is the harder challenge, and that a 5% profit margin improvement is realistic in most cases.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.