Outlook: Five Megatrends for 2023 and beyond…
1). Supply chains continue to shorten.
During the pandemic we saw countries struggling to source PPE and pressure to restrict the export of vaccinations. The result was a nervousness towards global supply chains and a move to bring production and manufacturing closer to home.
The energy crisis orchestrated by the war in the Ukraine and the measures taken against Russia has enhanced this concern further. European nations are now looking to increase their domestic energy production, hopefully through green initiatives.
Globalisation has been a megatrend on our school syllabus for decades but does this now mean that we have entered a phase of de-globalisation? And if so, what does it mean?
From a private asset perspective do private debt lenders need to now consider shortening supply chains within their credit analysis? Should private equity managers be looking for businesses that are able or well positioned to localise their supply chain?
2). Transition to a low carbon economy.
Despite all of the geopolitical unrest and uncertainty the transition to a low carbon economy remains the great challenge for our generation. Many countries have made pledges towards net zero goals or transition plans and these have been reaffirmed at various conferences of the parties over the years. For example, the UK The Disclosure Framework and Implementation Guidance are open for public consultation until 28th February 2023.
The amount of investment required for a global transition presents a huge opportunity for the alternative assets industry. Much of the infrastructure and expenditure will need to be provided by the private sector and alternative investments are well placed to capitalise with direct infrastructure, PE & VC into technology developers, lending to green projects among others. As with the analysis for supply chains an investments impact on the transition to a low carbon economy will become an increasingly important consideration.
Altum is proud to be a carbon negative business.
3). Interest rates continue to rise.
In order to tackle high inflation and the cost of living crisis central banks have raised interest rates from the historically low levels that we have experienced for the last decade. However, as many economists anticipate a prolonged recession lowering interest rates is traditionally one of the levers that central banks utilise to kick start an economy. On balance it looks like interest rates could potentially continue to rise until peaking at between 4-5% which is where they stabilise, at least in the short to medium term.
For Private debt, the asset class has flourished during the low interest period we have enjoyed since 2009 and therefore we will keep a keen eye on how it performs under these changing conditions. Given most instruments in private debt involve a floating rate of interest you would expect the risk adjusted return to remain attractive.
However the increased cost of capital is likely to put more strain on borrowers and therefore careful consideration of how rate increases will impact their businesses ability to service their debt will be increasingly important. Covenants, such as Debt Service Coverage Ratio are more likely to be breached as cost of capital increases and maintaining good communication channels with borrowers will be more important than ever for lenders.
Altum are able to provide facility agent and security trustee services for loan transactions to ensure covenants are monitored and communication between borrowers and lenders remains effective.
4). Talent acquisition and staff retention will be more important than ever before.
There has been a lot written and debated on the so called “great resignation” this year and the fundamental challenges that it presents for all industries.
The alternatives industry is not isolated from this. As alternative assets continue to grow (and all research suggests that it will) we will need more and more talented people to service the sector. Therefore recruiting, training and retaining people should be front and centre for all successful businesses strategy.
At Altum our ethos is people, process, technology in that order, we know our people are our most important asset and we work hard to maintain our industry leading levels of staff turnover. There is no secret formula to this but a combination of culture, career progression and opportunity, shared ownership and being purpose lead has served us well and like all businesses that want to continue to succeed we know you cannot rest on your laurels when it comes to the great talent challenge.
Digitalisation and automation.
A good way to deal with the talent challenge included in the paragraph above is to improve job satisfaction and one important way to do this is to look at how technology, digitalisation and automation can make routine jobs easier and free your colleagues up to concentrate on more value add and rewarding activities.
Its about working smarter not harder, there was a statistic that showed Leo Messi was walking or standing still for 87% of his time at this years world cup. But it’s the output that is important.
Perhaps just as important is the accuracy or improvements to quality control that come from automation.
At Altum we have worked to automate many of our processes, including tax return and financial statement production. This automation means that our work is not susceptible to transposition or human error and as a result our teams and clients can spend less time reviewing the final output and more time analysing and assessing the output instead to provide a higher quality and value add service.
As regulation modernises to catch up with the technology available such as in areas like electronic onboarding we expect to see far wider use of digital solutions for tasks that were up until recently manual processes.