It’s crystal ball gazing time again.
Despite the perils of forecasting in a world that has become more uncertain and more dangerous, there remains considerable practical value to firms and funds in anticipating where, as Wayne Gretzky famously said, the puck may be headed.
With this in mind, there are several broad trends that can be discerned and which together point to 2020 being a challenging year for participants in private capital markets.
- First, the flow of capital into private debt and private equity products is likely to ebb somewhat. This is because of the stellar performance of public capital markets across asset classes in 2019. Investors chase returns and the most recent returns from public markets have individual and institutional investors popping the champagne corks. Added to the perceived liquidity advantage of public markets, 2020 is likely to see capital surges into traded stocks and bonds, mutual funds and ETF’s.
This means that private capital market players will need to work harder to attract investor support, which in turn, implies devoting more resources to marketing and differentiated product development than in 2019. As well, pricing margins are likely to come under some pressure.
- Second, the risky new world disorder will push investors into what they perceive to be ‘safe havens’ for their money. So, gold as an asset class will continue to rise while new, untested vehicles, like cryptocurrencies, will take longer to reach widespread acceptance. In addition, deposits with established financial institutions, like the Schedule 1 banks, are likely to grow considerably, even facing the headwind of very low real interest rates.
Third, there are macro trends within the financial sector itself from which private capital markets are not immune and which are likely to only speed up in 2020. Those are:
- Price cutting. Fees on mutual funds, ETF’s and discount brokerages are getting cut to the bone. Just ask TD.
- Disclosure and transparency: we live in the age of the Great Reveal which encompasses everything from environmental impacts to potential conflicts of interest and fees.
- Disruptive technologies. Robo-advisers may displace significant numbers of human financial advisers. International and Canadian banks are shedding personnel due, in part, to the efficiencies provided by newer technologies, particularly the growing acceptance of mobile transactions.
- Fourth, living connected means that any missteps, intentional or otherwise, get instant and widespread coverage. This is particularly the case for data breaches in the financial sector. The case of Desjardins in 2019 is particularly instructive in this regard. We also live in an age of protest wherein mobilizing previously unformed constituencies via social media has become much easier than in the past. Importantly, governments are finding it harder and harder to get stable, majority support from voters and so are increasingly receptive to special purpose interest groups with specific grievances. As a result of these developments, 2020 is likely to witness increased corporate spending on data protection against hackers from around the globe as well as on appropriate insurance coverage for the organization, its directors and officers.
Last, demographics are rife with new challenges and opportunities for all in the financial sector. The Baby Boomers are hitting the ranks of seniors with the force of a major tsunami. This means that greater attention than ever before will need to be paid to KYC, with robust plans in place for dealing with more clients, their families, and counselors confronting the likes of Alzheimer’s and dementia.
- At the other end of the age spectrum, millennials have their own particular preferences and priorities, which include reliance on mobile technology to enact financial transactions and hyper-concern over environmental matters together with a firm interest in social impact investing.The challenge for many in the financial sector will be to address these priorities of the new investing generation. Mining, oil and gas and forest products investments may face significant hurdles in attracting millennial investors while real estate investments that are credibly ‘green’ are likely to be magnets for them as will be the growing sphere of social impact investing, that governments in Canada and elsewhere are beginning to prioritize and facilitate.
Bottom line: 2020 will be a tough year, but opportunities for profitable business, as ever, remain.
Richard Remillard specializes in financial sector policy and has extensive board, management and consulting experience in banking and venture capital and is a former PCMA board member.