Financial services: Short-term volatility & long-term value
In spite of the recent volatility in the stock prices of financial services firms in India, the savings focused on the sector remain an attractive destination for institutional investors. Investing in the financial services sector -- such as asset management and wealth management companies that specialise in managing and investing household and corporate savings -- is a must for investors with a long-term horizon in India.
Savings focused financial industry assists primarily households -- i.e., retail investors -- and corporates manage, invest and grow their savings by providing both products and services that enable the flow of these funds into the broader financial ecosystem. Asset and wealth management companies allow investors not just to earn investment returns from financial assets but also diversify their asset pool.
Access to financial assets is particularly important for retail investors in India, who have traditionally been more focused on real estate and gold and to an extent on bank fixed deposits for parking their surplus funds.
For private equity funds and sovereign funds looking to create large asset management and wealth management platforms, the opportunity lies primarily in two areas: One, retail clients who have access to financial products but are looking for more bespoke solutions and, two, retail clients who will have access to financial products for the first time in the coming years.
For retail clients who have access to financial products, the need is to offer more sophisticated services and products to assist them to manage their finances better, especially with a view on retirement assets.
One must note that average life expectancy in India has gone up from approximately 62.5 years in 2000 to 68.8 years in 2017. With improving health standards, the increasing longevity creates the need for a highly sophisticated retirement asset management industry. While we do have existing retirement solutions, the increasing longevity of a section of the population with relatively higher incomes provides opportunities for financial services firms to grow their offerings further in retirement assets.
The second opportunity for asset and wealth management firms emanates from the fact that per capita income is gradually rising in India. With the middle class expanding and set to have access to more savings in the years to come, there will be an opportunity for businesses to help a significant component of the population gain access to the financial markets to both boost and diversify their investment portfolios.
The above strategy of expansion of products and approaching new markets is applicable to both financial and strategic investors looking to grow and expand in the asset and wealth management industry. For financial investors, the opportunity is to create large asset management platforms that can scale up, assisted by technology. Granted that the nature of the industry is competitive, even as margins decline the capacity to increase assets under management at a rapid pace will deliver value. Technology has a crucial role to play in scaling up such businesses.
Also, there is tremendous scope for a platform that can create bespoke wealth management solutions. While there is an existing wealth management industry, previously mentioned trends such as longevity increase and the need for sophistication (in both product and service) will create the need for highly specialised businesses. For strategic buyers, the opportunity to tap into two distinct growth opportunities holds promise.
Creating large asset and wealth management platforms comes with its own set of challenges. Given the intense competition in selling financial products, financial services businesses require scale and need to both educate and assist retail clients. Alternatively, specialised service firms have the potential to succeed given the need for bespoke solutions. Industry trends in asset management companies are towards lower fees due to both competition and regulatory changes such as the measures announced by the Securities and Exchange Board of India (regarding mutual fund fees) in the recent past. The need to differentiate and focus will be vital.
Notwithstanding the current share price volatility of financial services firms, the investment opportunity that managing retail savings provides in India is immense. The convergence of the need for investment returns from retail investors with the broader secular trends of rising incomes in a relatively young country makes for an attractive business proposition if done well.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. The views expressed are personal. He can be contacted at [email protected] or @Taponeel on Twitter)