text: 2007 Recruiting Trends Asset and Wealth Management Table of Contents Section I Overview 4 Global Executive Summary 6 Russell Reynolds Associates' Asset and Wealth Management Practice 8 Russell Reynolds Associates' Asset and Wealth Management Practice Members 9 Russell Reynolds Associates' Global Presence Section II The Americas ! 11 United States Asset and Wealth Management 13 General Management 14 Investment Management – Equities and Fixed Income 16 Plan Sponsors, Endowments and Foundations 17 Institutional Distribution 18 Retail Distribution 19 Wealth Management 20 Risk Management, Legal and Compliance 21 Technology and Operations Alternatives 24 Hedge Funds/Fund of Funds 27 Real Estate Investing Globalization Credit Disruptions Convergence 33 Infrastructure 35 Private Equity 36 Canada 39 Mexico Section III Europe ! 43 United Kingdom 44 General Management 46 Investments and Investment Research 48 Sales, Marketing and Distribution 2 Table of Contents ! continued 50 France 53 Germany 55 The Netherlands Section IV Asia/Pacific ! 59 Australia 62 China and Hong Kong 66 India 69 Japan 71 Singapore Section V Looking Ahead 73 Looking Ahead 3 Global Executive Summary From the Boardroom to the Back Office, the Bar Is Raised amid Uncertainty and Flux ! Wall Street "sell-side" hiring has come to a virtual standstill, but asset and wealth management firms continue to hire aggressively and are now driving the demand for talent. With capital still pouring into the sector, we expect aggressive hiring to continue well into 2008. ! The past year has seen unprecedented turnover in the C suite, brought on by a senior cohort reaching retirement – a decision often accelerated by the enormity of future challenges and market dynamics. In addition, boards have never been more impatient with perceived underperformance by senior management. As a result, recruiting demand for leadership in both traditional and alternative investment businesses ran ahead of 2006 by more than 15 percent in every geographic market we serve. ! Owners, shareholders and investors continue to place a high premium on the ability of senior management to control risk, both investment and operational in nature. Significantly increased market volatility in the second half of the year has put the entire industry on watch, and, although it has not significantly affected revenue growth and profitability at most firms, it has brought this leadership issue to the forefront in all our work. ! The demand for chief investment officers in all segments of the industry is off the charts, escalating compensation and widening "move premiums." The desire for talent with cross-asset class experience and knowledge of alternatives is leading to some earlier-than-expected promotions. All eyes will be on the performance of this new group to see whether or not they will prove to be short- or long-term solutions to the talent shortage. ! As the retirement of the baby boomers accelerates, both institutional and retail sides of the industry are gearing up to put together advice platforms tailored to these customers. A premium is placed on executives who can provide true strategic thought leadership to anticipate where this nascent market is headed and build firm capabilities accordingly. As a byproduct of this trend, demand for retail distribution, sub-advisory and wholesaling professionals returned. ! There is a bifurcation in the demand for institutional distribution talent in the United States and Europe. Search work for traditional institutional clients has remained strong although compensation appears generally flat, moving in line with overall market and asset-gathering successes. The demand for professionals with skills in structured finance and alternatives, however, continues to grow aggressively and is one of the busiest areas of our practice, with compensation levels jumping 30 percent or more and often including significant revenue-sharing deals and second-year guarantees common. ! Hiring for technology and operations (T&O) leadership has continued to be robust, with an emphasis on T&O leaders who can genuinely partner with the front-office business as well as with 4 Global Executive Summary ! continued cross-functional peers. There is an increasing emphasis on candidates with firsthand understanding of investment management business processes, ranging from risk management and financial reporting to specific product strategies and portfolio management. Larger firms are seeking talent that can help them transform the back-office functions into revenue generating businesses. ! The institutionalization of the alternatives arena continues as evidenced by merger and acquisition activity and initial public offerings. Attention is now focused on the continued build-out of administrative and functional leadership teams. Searches for human resources, legal, and technology and operations (T&O) talent has kept up the rapid pace of recent years. In addition, we have seen and will continue to see more experienced chief executive officers being brought in to take the reins from entrepreneur-founders. These trends are particularly pronounced in Asia as new platforms emerge. ! In real estate, borders have evaporated as the move to find investment opportunities outside the United States is fueling a rush to build out operations and capabilities in Latin America and Asia. Investment professionals with a track record of high performance in these markets – who understand the real estate aspects of a deal and can accurately underwrite the risk – are exceptionally scarce. ! Across the alternatives spectrum, 2007 was the year of convergence, with hedge funds in real estate, real estate in private equity and private equity in hedge funds. As capital continued to pour in, few wanted to settle for their historical piece of the pie. As these platforms become increasingly global and diversified, the need for professional managers accelerates. Firms require intellectual and cultural leadership, process-oriented decision making, and the ability to manage the risks of a business moving at top speed. ! Emerging markets that are being upgraded by rating agencies have put them within the risk tolerances of a greater number of investors. The private equity firms which can respond the quickest to this opportunity will enjoy lower competition and lower multiples allowing them to achieve returns that are not available in more mature markets. 5 Russell Reynolds Associates' Asset and Wealth Management Practice The changing complexion of the asset and wealth management industry reflects pension reform and a heightened regulatory environment, enormous intergenerational wealth transfer, growing sophistication among retail investors and unprecedented demand for transparency on all levels. New players are continually altering the landscape as clients seek sustainable sources of alpha and refuse to pay active management fees for market returns. Traditional long-only investment firms, hedge funds, real estate investment managers, plan sponsors, insurance companies and advisory firms are converging to offer new products, services and delivery platforms. As the needs of asset and wealth management organizations grow increasingly complex, one pre-eminent, full- service executive search firm is uniquely positioned to anticipate and satisfy their evolving requirements: Russell Reynolds Associates. Structured as a global boutique, our Asset and Wealth Management Practice has an established track record of success in partnering with institutional and retail investment firms, private wealth managers and hedge funds, private equity and real estate clients to assess and recruit: ! executive leadership team; ! seasoned investors across all asset classes; ! sales, marketing and client service professionals; ! infrastructure, technology and systems managers; ! risk management, legal and compliance, finance and human resources executives. ASSET PRIVATE WEALTH ALTERNATIVES MANAGEMENT MANAGEMENT Institutional Private Banking Hedge Funds Retail Family Offices Real Estate Plan Sponsors, Endowments Independent Financial Infrastructure and Foundations Advisors Private Equity Investment, Distribution, Management, Legal / Compliance / Risk Management Specialists, Seamless Coverage, Speed We employ a matrix approach of industry coverage that includes product and geographic specialists. This matrix of specialists provides clients with unrivaled industry coverage, enabling each region to identify and source potential candidates quickly and effectively. 6 Russell Reynolds Associates' Asset and Wealth Management Practice ! continued Relationship and Partnership We work with a select number of organizations, seeking to build relationships only where we are likely to play a key role in an organization's success. This strategy provides our clients with a greater number of companies from which to draw candidates. About Russell Reynolds Associates Russell Reynolds Associates is the most trusted name in global executive search and assessment. Through our 38 wholly owned offices, the firm's more than 275 professionals conduct senior-level search and assessment assignments in a range of industries for public and private organizations of all sizes. With its one-firm culture, deep knowledge of major industries and unwavering commitment to client service, Russell Reynolds Associates is uniquely qualified to help clients find the best leaders and to advise them on optimizing their talent. The firm's Web site is www.russellreynolds.com. 7 Russell Reynolds Associates' Asset and Wealth Management Practice Members The Americas Asia/Pacific Europe Atlanta Hong Kong Amsterdam Susan Boyd Gareth Stubbings René de Zwaan Richard Perkey May Tung Brussels Boston New Delhi Pascale Simon Stephen Fitzgibbons Sanjay Kapoor Laura K. Pollock Frankfurt Alexander G. Thomson Shanghai Mark Unger Lynn Tidd Joy M.E. Lim London Chicago Singapore Simon Black Thomas G. Putrim Choon Soo Chew Symon Elliott Lyndon A. Taylor Lucia Ferreira Sydney Amanda Foster Los Angeles/San Francisco Catherine Andersen Simon Hearn Jeffrey Warren Lynn Anderson Heidi Mason Madrid Mexico City José López Eugenio Riquelme Tokyo Yukihiro Koshiishi Paris New York Hiroyuki Koshino Paul Jaeger Shawn Banerji Nicolas Manset Hannah Brazier Debra Brown Warsaw Heather Hammond Dorota Czarnota James Houston Cornelia Kiley Zürich Graham Michener Taco van der Feltz Peter Reichman Charles Watson George Wilbanks São Paulo Renato Furtado Fátima Zorzato Toronto Shawn Cooper Washington, D.C. Denise Grant 8 Russell Reynolds Associates' Global Presence San Francisco Singapore Milan The Americas 101 California Street 2 Shenton Way Via Mascheroni, 5 Suite 2900 #08-01 SGX Centre 1 20123 Milan Atlanta San Francisco, CA 94111-5829 Singapore 068804 Italy 1180 Peachtree Street, NE United States of America Singapore Tel: +39-02-430-0151 Suite 2250 Tel: +1-415-352-3300 Tel: +65-6225-1811 Atlanta, GA 30309-3521 Munich United States of America São Paulo Sydney Ludwigstraße 7 Tel: +1-404-577-3000 Av. Nações Unidas, Level 41 Australia Square 80539 Munich 11857 - 12º Andar 264 - 278 George Street Germany Boston 04578-000 São Paulo-SP Sydney NSW 2000 Tel: +49-89-24-89-81-3 One Federal Street Brazil Australia 25th Floor Tel: +55-11-3345-1414 Tel: +61-2-9258-3100 Paris Boston, MA 02110-1007 7, Place Vendôme United States of America Stamford Tokyo 75001 Paris Tel: +1-617-523-1111 301 Tresser Boulevard Izumi Garden Tower 14F France Suite 1210 1-6-1 Roppongi Tel: +33-1-49-26-13-00 Buenos Aires Stamford, CT 06901-3250 Minato-ku, Tokyo 106-6014 Manuela Saenz 323 - 7º Piso United States of America Japan Stockholm C1107BPA Buenos Aires Tel: +1-203-905-3341 Tel: +81-3-5114-3700 Biblioteksgatan 6-8 Argentina SE-111 46 Stockholm Tel: +54-11-4118-8900 Toronto Sweden Scotia Plaza, Suite 3410 Tel: +46-8-545-074-40 Chicago 40 King Street West Europe 200 South Wacker Drive M5H 3Y2 Toronto, ON Warsaw Suite 2900 Canada Amsterdam Belvedere Plaza Chicago, IL 60606-5802 Tel: +1-416-364-3355 World Trade Center ul. Belwederska 23 United States of America Tower H, 18th Floor 00-761 Warsaw Tel: +1-312-993-9696 Washington, D.C. Zuidplein 148 Poland 1701 Pennsylvania Avenue, NW 1077 XV Amsterdam Tel: +48-22-851-68-38 Dallas Suite 400 The Netherlands 8401 N. Central Expressway Washington, D.C. 20006-5810 Tel: +31-20-305-7630 Zürich Suite 650 United States of America Genferstrasse 21 Dallas, TX 75225-4404 Tel: +1-202-654-7800 Barcelona Edificio Prisma 8002 Zurich United States of America Switzerland Tel: +1-214-220-2033 Avda. Diagonal, 613, 2˚A 08028 Barcelona Tel: +41-44-447-30-30 Houston Asia/Pacific Spain 600 Travis Street Tel: +34-93-494-9400 Beijing Suite 2200 Suite 1320, China World Tower I Brussels Houston, TX 77002-2901 No. 1 Jian Guo Men Wai Avenue Boulevard St.-Michel 27 United States of America Beijing 100004 B-1040 Brussels Tel: +1-713-754-5995 China Belgium Tel: +86-10-6505-2688 Tel: +32-2-743-12-20 Los Angeles 11100 Santa Monica Blvd. Hong Kong Copenhagen Suite 350 Room 1801, Alexandra House Østergade 1, 1st Floor Los Angeles, CA 90025-3384 18 Chater Road Central DK-1100 Copenhagen K United States of America Hong Kong Denmark Tel: +1-310-775-8940 China Tel: +45-33-69-23-20 Tel: +852-2523-9123 Menlo Park 2500 Sand Hill Road Frankfurt Melbourne MesseTurm Suite 105 15th Floor 60308 Frankfurt am Main Menlo Park, CA 94025-7015 Bourke Place Germany United States of America 600 Bourke Street Tel: +49-69-75-60-90-0 Tel: +1-650-233-2400 Melbourne VIC 3000 Australia Hamburg Mexico City Tel: +61-3-9603-1300 Stadthausbrücke Torre Reforma Paseo de la Reforma 115 - 1502 1-3/Fleethof New Delhi 20355 Hamburg Lomas de Chapultepec A4, Tower A Germany México 11000, D.F. The Qutab Hotel and Apartments Tel: +49-40-48-06-61-0 México Shaheed Jeet Singh Marg Tel: +52-55-5249-5130 New Delhi 110 016 London India 24 St. James's Square Minneapolis/St. Paul Tel: +91-11- 4603 4600 London SW1Y 4HZ 225 South Sixth Street Suite 2550 United Kingdom Shanghai Tel: +44-20-7839-7788 Minneapolis, MN 55402-3900 Room 4504, Jin Mao Tower United States of America 88 Century Avenue Madrid Tel: +1-612-332-6966 Pudong, Shanghai 200121 Calle Miguel Angel,11 China Seventh Floor New York Tel: +86-21-6163-0888 28010 Madrid 200 Park Avenue Suite 2300 Spain New York, NY 10166-0002 Tel: +34-91-319-7100 United States of America Tel: +1-212-351-2000 9 The Americas United States Asset and Wealth Management U.S. General Management The Pressure Is On – Markets Are More Challenging and Patience Is Short 2007 Trends ! Despite the significant mid-year downturn in the U.S. capital markets and the global uncertainty brought on by the widespread liquidity crisis, the demand for C suite executives in the asset and wealth management arena remains robust. Recruiting demand for leadership at the top of virtually every sector in both traditional and alternative investment businesses is running ahead of 2006 by more than 15 percent in every geographic market we serve. ! Leadership succession is a recurring theme at the largest global asset management franchises. There has been a significant surge in chief executive officer (CEO) recruiting assignments, both for independent public investment companies and the asset and wealth management divisions of diversified financial services firms. ! The retirement market is emerging as a major theme guiding strategic thinking at a growing number of firms, particularly focusing on retaining or capturing a larger share of baby boomer post- retirement assets. The focus is widespread, ranging from investment-only defined-contribution sales programs at independent boutiques to guiding major organizational changes and recruiting at the top of the house at several of the largest firms. ! New product initiatives including structured products and liability-driven investment (LDI) strategies continue to be major drivers for defining next-generation leadership at institutional money managers. This need is acute since plan sponsors and other investors are searching for pure alpha and are willing to pay a premium for this skill. The survival of institutional asset managers depends on distinct leadership and visible platform differentiation in the face of their clients' frozen pension plans and the widespread availability of derivatives-based capital markets structures, which are rapidly encroaching. ! Owners, shareholders and investors continue to place a high premium on the ability of senior management to control risk, both investment and operational in nature. Significantly increased market volatility in the second half of the year has put the entire industry on watch, and, although it has not significantly affected revenue growth and profitability at most firms, it has brought this leadership issue to the forefront in all our work. 13 U.S. Investment Management – Equities and Fixed Income Volatility Returns and the Quest for Alpha Continues EQUITIES 2007 Trends ! Despite the bumpy equity markets and the return of volatility mid-year, demand for equity investors remains strong in 2007. ! International and emerging markets analysts and portfolio managers continue to dominate much of our equity search activity in the United States. Clients continue to pursue investors with intimate knowledge of non-U.S. regions and/or global sectors. ! "Quants," especially Ph.D.s with chartered financial analyst (CFA) designations are highly sought after by quantitative funds and structured products as well as by fundamental shops that value their modeling skills. Even with the dramatic performance downturn experienced by quantitative managers last summer, demand for these skills remains strong. ! Value equity managers still prevail. Few of our clients actually launched searches for growth managers, though relative value and GARP (growth at a reasonable price) were more common than deep value. 2008 Expectations ! We would not be surprised to see the market for U.S. public equity investors level off a bit, bringing with it an end to the now nearly standard guarantees and "make whole" payment provisions. ! On the international front, in contrast, we see no slowdown in demand for international and emerging markets talent. The talent pool filters of language skills, local relationships and stringent immigration/visa laws will keep this segment of the market tight. 14 U.S. Investment Management – Equities and Fixed Income ! continued FIXED INCOME 2007 Trends ! Overall, recruiting in fixed income has been slower this year than in 2006 and 2005. The first half of the year saw considerable activity in structured products and high yield, with very little work in investment grade. ! Early 2007 was fairly quiet in the fixed income markets, bringing a correspondingly slower pace of recruiting fixed-income investors. Firms with exposure to subprime mortgages took a beating, but problems at these firms seemed contained. The month of August felt like a year unto itself. Subprime mortgage woes seeped into other parts of the market and the resulting liquidity and capacity constraints at some firms unleashed a wave of volatility. Many managers focused on little other than keeping their heads – and returns – above water. The spillover into the credit markets caught some firms by surprise, which in turn surprised their investors. Some observers saw it as triage; others as opportunity. While September brought calmer seas, few investors went so far as to announce a return to stability, particularly given that the carnage from the sell-side mortgage groups was still being absorbed. ! Firms managing insurance assets battled for talent in order to seize near-term opportunities in the segment. Several firms have been actively building capabilities and strengthening leadership. ! Early indications moving into the fourth quarter suggest increased interest in distressed debt professionals, although a substantial dislocation in the mortgage sector is resulting in significant retrenchment by several large players. An increase in transparency is likely to result from the market turbulence this year, as is a renewed focus in risk management. This push may result in increased hiring activity for risk management professionals, especially those with hedge fund experience. 2008 Expectations ! Early indications moving into the fourth quarter indicate increased interest in distressed debt professionals while a substantial dislocation in the mortgage sector is resulting in significant retrenchment from several large players. ! An increase in transparency in 2008 is likely to result from market turbulence in 2007, as is a renewed focus in risk management. This push may result in increased hiring activity for risk management professionals, especially those with hedge fund experience. 15 U.S. Plan Sponsors, Endowments and Foundations The "Move Premium" Widens 2007 Trends ! Recruitment in this area has been at a frenzied pace for the last several years. This is a very tight market, with plan sponsors, endowments, foundations, family offices and even money management firms that serve institutions or private clients looking for investment professionals with knowledge of a broad array of asset classes, especially alternatives (hedge funds, real estate, private equity, derivatives strategies) and established relationships with managers of sought-after funds. ! There is a further premium placed on senior talent that can provide strategic direction, manage the career development of more junior professionals and who can figure into succession plans themselves. ! In many chief investment officer searches, the insatiable appetite for expertise in alternatives has resulted in some premature promotions. As a result, screening for quality becomes all the more important, given that few truly are qualified to make the leap to the top job. ! To meet their talent requirements, organizations are cross-training or shifting internal team members as well as placing a new focus on internal professional development and on entry-level recruiting practices. 2008 Expectations ! Next year will bring a continuation of 2007's trends. Demand for asset allocation talent and manager selection specialists with strong relationships and deep knowledge should be as strong as in recent years. ! A greater willingness to hire the "best available athlete" and invest in his or her training will likely alleviate some of the pressure on this market segment. 16 U.S. Institutional Distribution A Scramble to Solve the Retirement Puzzle 2007 Trends ! Investment and commercial banks, insurance companies, and traditional investment management firms continue their rush to provide liability-driven investment strategies to institutional clients facing the exceptional complexity of pension and retirement funding challenges. This convergence among products (derivative-based products, structured products and traditional solutions) is leading to the migration of capital markets professionals to senior leadership positions in institutional distribution. ! Numerous LDI teams in both distribution and product specialist areas have been staffed and launched, with talent coming from pension consulting, benefits consulting and plan sponsors. ! Alternative investment boutiques continue to successfully attract top-decile pension sales professionals away from larger traditional firms because of the perception of greater demand for their products and the revenue-sharing arrangements they offer, which appear more lucrative and are more directly aligned with firm success. ! We see an interesting bifurcation of the demand for talent. Search work for traditional institutional clients remains strong, while the demand for professionals with skills in structured finance and alternatives grows aggressively and has been one of the busiest areas of our practice. 2008 Expectations ! Alternatives firms will continue their efforts to raise assets and vie for top sales talent that bring deep relationships and product knowledge. ! As long as capital keeps flowing, firms will continue to add to their distribution ranks. 17 U.S. Retail Distribution The Boom in Post-retirement Advice Reshapes Retail Distribution 2007 Trends ! Growth in the post-retirement advice and guidance business is driving significant reengineering, product development, branding and product sales reorganizations in every segment of retail financial services including banks, brokers, insurers and mutual fund firms. As a result, search assignments for chief marketing officers (CMO) and retail distribution executives have quadrupled over the previous year, reaching levels not seen since the surge in the early 1990s in 401(k) bundled-provider build-outs. ! Several major full-service defined contribution service providers are preparing for major multi-year reinvestment campaigns to "rebrand" their businesses in hopes of securing a larger share of the retirement rollover pie. Product development and product management executives are in demand, with a premium going to those with experience in underwritten annuity-type structures, as well as high-net-worth customized brokerage delivery channels. More than a dozen searches followed this theme in 2007, which was non-existent three years ago. ! Competition in the subadvised channel, including investment-only defined contribution, insurance annuity, private label, and single- and multi-manager fund subadvice is growing, leading to significant recruiting volume. This is particularly the case for mid-sized investment advisory firms that can not afford to build large wholesaling teams to cover the bank, broker or independent channels. Even the cost to build national brands has become prohibitively expensive. ! The largest investment advisory firms with the critical mass and brand presence necessary to command shelf space with the largest distribution powerhouses (such as national wirehouses and banks and the largest supermarkets) are beginning a reinvestment process to recruit a new breed of wholesaler. These sophisticated intermediaries need investment experience – and often a CFA designation – to gain the respect of the client advisor and to assist that advisor in developing sophisticated strategies for the mini-institutional and ultra-high-net-worth clients. New product initiatives such as risk-adjusted return strategies, tax-efficient investing, structured products for estate planning and lifetime income guarantees are driving the demand for more sophisticated wholesalers. 2008 Expectations ! Given the recent resurgence of this segment, we expect recruiting for U.S. retail distribution professionals to continue to accelerate through 2008. Retail brokerage platforms will continue to consolidate and asset managers will continue to focus on expanding their share of the high-net- worth/mass affluent market. 18 U.S. Wealth Management Money in Motion 2007 Trends ! Merger activity in the United States, including combinations such as Bank of America with U.S. Trust and Mellon with the Bank of New York, has unleashed some volatility in the private wealth management talent market. While many portfolio managers and client service professionals find these mega-platforms attractive because of their resources and the wide range of products and services that can be offered to clients, others prefer a smaller, more intimate and, perhaps more nimble environment where they can offer their clients a greater degree of customization. As a result there is money in motion as portfolio managers, relationship managers and clients vote with their feet. ! Recruitment of CIOs for family offices and private wealth platforms remains strong in 2007. Portfolio strategists and asset allocators who can deliver unbiased, holistic, customized advice for the wealthiest clients continue to be in short supply in this competitive market. 2008 Expectations ! The wealth market will likely remain competitive and highly segmented. ! Platforms that allow investors to service their clients in a customized and holistic fashion will find themselves with an advantage in the talent marketplace. 19 U.S. Risk Management, Legal and Compliance Alternative Investments Define a New Frontier 2007 Trends ! The return of volatility and implosion of the structured investment vehicles market has escalated the need for risk management professionals at the investment and firm-wide levels. Many firms are examining how compliance programs could have helped prevent such issues. ! Product and business line expansion, domestically and cross-border, has resulted in attempts to unify the approach to compliance, especially by the largest firms. Our Legal, Governance and Compliance Practice has witnessed continued demand for compliance officers with broad product experience and the ability to create an integrated approach – though at a slower pace than in previous years. Most of the comprehensive compliance build-outs are largely completed and leaders are grooming internal staffers and are promoting from within. ! The need for independent chief compliance officers who report directly into the board at major mutual fund firms also continues, though many candidates find the role limiting and somewhat removed from their peers who reside in the business units. ! The push into alternative products – hedge funds, real estate, infrastructure and private equity – is a greenfield in legal and compliance. Many in the talent pool is made up of young, smart, quantitative "hot shots," often with law degrees and lots of potential but little practical experience. No one is quite sure where the U.S. Securities and Exchange Commission and other regulators will come down on issues; but nevertheless, searches for legal and compliance professionals who have dealt with side-by-side with management (of long-only and long/short products) continue at a brisk pace. ! Leadership and supervisory experience continue to be in great demand 20 U.S. Technology and Operations After Gaining Prominence, Contributing to the Bottom Line 2007 Trends ! Hiring for technology and operations (T&O) leadership has been robust through the first three quarters of 2007. In keeping with 2006 trends, there continues to be an emphasis on T&O leaders who can genuinely partner with the front-office business as well as with cross-functional peers. This has manifested itself in an increasing emphasis on candidates with firsthand understanding of investment management business processes, ranging from risk management and financial reporting to specific product strategies and portfolio management. A proven record of successful collaboration with constituents whose own roles are being heavily affected by technology, such as traders undertaking the rapid adoption of electronic trading, also is highly sought after in the marketplace. Corresponding product knowledge – for example, the different requirements to support equity and credit derivatives – is critical as well. ! Many firms are focused on attracting strategic T&O executives who can anticipate the changing regulatory and compliance landscape and serve as proactive leaders within the organization on the subject. This is a direct reflection of the desire of growing firms, particularly those that are private partnerships, to create "compliant," transparent operating environments – but not at the price of becoming "institutional" or bureaucratic. ! As in 2006, larger firms, where the T&O budget typically constitutes a significant line item, are rethinking the "out of sight, out of mind" attitude that was historically directed toward these functions. Running T&O "like a business" is an increasingly common mantra, especially in large firms that can leverage the resources of a global institution. As a result, many of these firms are in the process of transforming the back-office functions into revenue-generating businesses. Areas such as trust and custody, fund accounting, transaction processing, and infrastructure hosting now are contributing to top-line growth and firm-wide profitability. ! Privately held firms and firms targeting the "middle market" have been especially active in 2007. Historically these firms have recognized the inherent value of information technology and operations in their operating models but have been hesitant to invest in these functions like they have in finance or marketing. The potential for regulation is presenting an impending business challenge in areas such as disclosure and taxation and is causing these firms to play a bit of catch- up regarding T&O investment. ! Hedge funds are emerging as competitors for talent and are offering compensation programs that are hard for divisional or line T&O leaders to ignore. The majority of these firms are not recognized for their T&O capabilities and accordingly, most hiring efforts for these shops are targeted to larger, best-in-class institutions and specifically at individuals who are "hands on" and entrepreneurial. But hedge funds' high turnover, combined with recent market volatility, has put them at a disadvantage in attracting truly top-tier institutional talent. Even so, there are approximately a half 21 U.S. Technology and Operations ! continued dozen large, established hedge funds that have been successful in aligning technology and operations with their business interests. These firms consistently find themselves targeted by larger institutions as well as by other hedge funds. 2008 Expectations ! Technology and Operations will maintain its position of prominence and will be called upon to serve as a vital contributor to the creation of business value as organizations take on the increasing challenges of optimization and improved efficiencies in an increasingly complex, global context. This will manifest itself in a continued trend toward global shared services that transcend business lines, functions and geography. ! T&O executives with cross-functional expertise combined with direct business line and product knowledge will continue to command a premium. As a result, a number of T&O roles will likely be filled by internal candidates who come from outside the T&O function but from within the organization. They will bring the necessary internal relationships necessary advance a shared- services agenda. 22 Alternatives Hedge Funds/Fund of Funds Confidence Shaken, but the War for Talent Continues 2007 Trends 2007 hedge fund trends can be viewed along a distinct, divided timeline: pre- and post-summer market tumult. While the depth and extent of the ongoing subprime mortgage problems, liquidity questions, fear of higher cost of capital and credit constraints have yet to be fully realized, what remains constant in the hedge fund industry is the continued search for market inefficiencies, mispriced securities, cross-market arbitrage opportunities and the war for talent. In last year's report, we commented on the themes of convergence, consolidation and diversification. Much of this continued into 2007, both before and after the summer storm, marked by a few distinctions: ! There were fewer mega-launches of $1 billion+ hedge fund start-ups. ! Many of the larger firms continued to focus on adding operational talent, especially in the areas of technology development and support, middle-office operations, and legal and compliance and financial reporting functions, in the quest to better institutionalize their platforms. There was markedly lower search activity for risk management professionals in 2007, likely due to the great number of 2006 openings that were successfully fulfilled. ! This year saw increased merger and acquisition and initial public offering (IPO) activity, resulting in demand for functional expertise required by larger and/or public entities, including corporate tax and audit, public relations/external communications, investor relations and more expanded human resources departments (i.e., recruiting, employee relations/performance measurement, compensation and benefits, and leadership development). ! There was continued growth of activist and private capital strategies by hedge funds seeking less liquid, longer-term investments with notable interest for mezzanine and middle-market finance experts who had prior buy-side experience and/or those who focus on energy, financial and consumer industry sectors. Firms with dedicated private equity funds drew higher candidate interest than the balance sheet hedge fund investors, who were perceived to be "dabbling" and less serious about developing private equity as a diversification strategy. ! Long-only players continued to develop long/short or market neutral strategies, including 130/30 funds, resulting in an increased demand for professionals with prior shorting experience. However, in a move to retain existing talent, some firms took a bet on their long-only analysts and portfolio managers with no previous short experience, often requiring them to first incubate their strategy in a "paper portfolio lab" to demonstrate positive performance prior to launch. ! Lines between the traditional and alternative players continued to blur as hedge fund managers further developed long-only and 130/30 strategies or offered bank loans and insurance solutions. 24 Hedge Funds/Fund of Funds! continued ! Hedge funds moved further into fund of funds waters, launching strategies focused on external managers, either seeded from a captive pool of proprietary capital or from third-party investors. Multi-family offices, consultants and fund of funds were targeted by hedge funds seeking talent to manage these investments in external funds. ! Smaller funds, despite strong performance, struggled to catch the attention of the larger, institutional investors. As one endowment allocator explained, "Several years ago, the larger, well- performing, brand funds were closed for capacity. We had no choice but to seek out emerging managers. Now, everyone is open, often with multiple product offerings. Even if we had the resources to diligence the smaller funds, we might not have the risk appetite or the relationship management breadth to cover a larger portfolio." ! Large asset allocators and gatekeepers (for example, public and corporate pensions, fund of funds, consultants' endowments and foundations) were busy adding headcount in the areas of operational due diligence, analysis and portfolio management as they increased capital to fund of funds and/or hedge funds. ! Not surprisingly, the greatest functional search demand continues to be for distribution professionals (sales, service, relationship management and product specialists) as funds of all sizes and strategies continue to compete for client retention or an increased share of institutional capital. ! This year saw a continued focus and demand for analysts and portfolio managers specializing in emerging markets and in distressed debt. ! There was continued fear of compression on management and incentive fees, particularly for fund of funds. However, fund of funds still are the preferred route for pension funds into alternative investments. Indeed, 2007 marked an unprecedented number of inquiries from fund of funds players seeking experienced sales executives with established relationships in the Public Plan and Taft- Hartley communities. Post-summer 2007 and 2008 Expectations The current market complications have produced a rise in investor reticence, and witnessed some hedge fund managers fleeing to the safety sidelines. The future outlook is uncertain. But as Ralph Waldo Emerson noted, "when it is darkest, men see the stars." Indeed, many view the recent turbulence as a chance to move ahead opportunistically, taking advantage of market dislocations and pushing the throttle forward to recruit talent that previously had not answered the phone but are now humbled, less complacent and more actively seeking to understand their career options. Our predictions for 2008 include: ! The battle will continue for distribution professionals with proven track records raising significant capital from larger, institutional investors. They also must demonstrate a depth and breadth of product understanding to manage existing relationships and cross-sell new strategies. 25 Hedge Funds/Fund of Funds! continued ! There will be a growing need for general management talent (CEO, COO or president) as hedge fund founder/owners take on more external roles as investor-facing, non-executive chairpersons (particularly at publicly traded hedge funds) or, focus on steering portfolio management efforts through uncertain markets. ! Talented distressed debt analysts and portfolio managers will remain at the top of everyone's wish list. ! Managers exposed to subprime market and structured finance deals suffered disappointing returns. So, too, did those managers – most notably in managed futures shops – with strategies which relied on quantitative modeling that could not predict the huge swings in market conditions. Many of these managers are understandably holding steady rather than recruiting additional headcount, and we expect this to continue into the first half of 2008. ! As hedge fund service providers (including legal, accounting, administration, consulting) continue to see their professionals picked off by their clients, they will continue to fill these gaps among their personnel. Prime brokers actually are adding headcount in the areas of collateral management, hedge fund sales and client service, risk management and technology/risk support. ! There will be increased demand from retail and private wealth management groups for product specialists as well as sales and service professionals, as individual investors continue to show interest in broadening their asset allocation to alternative investments. ! We expect to see continued demand for larger or public company expertise in the areas of tax, audit, human resources and investor relations. ! Both hedge fund portfolios and the hedge fund workforce will continue to globalize, with U.S.- based funds extending their presence into London, Hong Kong, Singapore, Tokyo and other emerging markets. ! There is likely to be more consolidation, due to acquisitions by large institutions that see acquiring a hedge fund as an attractive way to broaden their offerings in alternative investments. There also will be increased IPO activity from those funds seeking to secure so-called "permanent capital." ! Professionals at all levels of experience, across an array of functional disciplines, and from both sell- and buy-side shops of varying sizes will continue to be much more open to exploring the opportunity landscape as a result of these less confident and more complicated times. This will accelerate after the distribution of year-end bonuses. 26 Real Estate Investing The (Real Estate) World Is Flat Three major trends in 2007 defined hiring priorities and drove compensation: – Continued globalization of real estate – Credit disruptions – Convergence among hedge funds, real estate and private equity GLOBALIZATION 2007 Trends Just as Tom Friedman provided evidence for a "flat" global economy in his 2005 blockbuster, anyone who was involved in the real estate market in 2007 discovered the same flat world. As capital continued to flow into real estate like water from a fire hose, and cap rates in the United States continued to decline, investors began running for the border. Capital raises for funds with exposure to anything outside the United States – India, Latin America, Asia or Central Europe and Europe – had aggressive targets, closing ahead of schedule with more equity than initially sought. ! Whether in India, Latin America, Asia or Central Europe, it is increasingly difficult to identify – and increasingly expensive to retain – local talent that can both understand the real estate in a deal and accurately underwrite the risk involved. ! Although real estate investment funds in the emerging markets were looking for the ex-pat who had spent time in the United States or the United Kingdom and was ready to return home, those individuals were similar to hen's teeth – often discussed but never seen. ! With international capital flowing into Latin America for the fifth year, the talent market in Mexico is more challenging and sought-after executives are more likely to be locked in with aggressive multi-year cash compensation packages and significant carried interest. In the South American markets, the talent pool is simply not as deep. The recent influx of capital in Brazil has resulted in a ferocious bidding war for talent and a rash of recent IPOs has created long-tailed contracts. ! Funds in Asia are highly active, investing in property development as well as existing assets – especially in the residential and retail sectors, which are among the strongest growth opportunities in this region. ! During the first half of 2007, direct real estate investment in the Asia/Pacific region was up 12 percent, to U.S. $55 billion, with a significant proportion of the increase coming from additional 27 Real Estate Investing! continued ! cross-border investment. Mainland China, Japan and Singapore are among the region's strongest real estate markets. ! The pipeline of funds to be launched in 2008 will put an added emphasis on capital raising and client servicing/relations in the region, and we expect demand for talent will reach unprecedented levels. ! A number of investment banks and funds also have been active in real estate development. Deutsche Bank entered a joint venture with the Hilton Group in China to build a series of four-star hotels and JPMorgan is making its first foray into Shanghai to develop a Grade-A commercial building in partnership with the domestic giant China Overseas Land & Investment. ! The real estate market in India has been very active. Development activity has gained rapid momentum across the major metropolitan areas as well as in smaller areas and across residential, commercial and retail segments. Foreign direct investment has been allowed by the government, leading to the rapid establishment in India by global real estate funds. As a control on the speculation and hoarding of land and properties, the Reserve Bank of India has imposed some very strict controls on bank lending to the real estate sector. This has driven developers to private equity and real estate funds, and in some cases to the capital markets (in the form of IPOs). ! Historically, the real estate investment business in India was controlled by small, regional players with all critical decisions being made by promoters/owners of development companies. As a result, the sector had not attracted professional talent in the past, and that has led to a severe talent shortage during a period of growth. ! The drive for talent in real estate fund of funds has escalated in the last 12 months, across large and small firms: bulge bracket, advisors and smaller independents. The most desired skill is the ability to both raise money and perform due diligence on real estate managers, especially for emerging managers with less than $1 billion in assets. A global perspective with fluency regarding funds in Europe and Asia, as well as in the United States, is also top of mind. 2008 Expectations ! Interest in global real estate opportunities will only increase in 2008, but the pool of talent that can deploy capital across regions and realize returns for investors through a variety of strategies and vehicles will not – so the supply-demand disequilibrium will worsen, driving compensation levels for existing talent even higher. ! In India, the market is expected to correct somewhat in certain areas, though strong demand in the metropolitan regions continues to drive capital costs as well as rentals. Most development projects underway are experiencing delays due to a lack of leadership talent, contractor capacity and the necessary support infrastructure and equipment. This is likely to create more supply bottlenecks and continue to drive higher prices/rentals. 28 Real Estate Investing! continued ! The accelerated drive of real estate funds being launched in Asia is expected to continue well into 2008. 29 Real Estate Investing! continued CREDIT DISRUPTIONS 2007 Trends In August, the failure of real estate-backed structured credit vehicles sent shock waves through the balance sheets of large bulge-bracket firms with significant structured finance exposure. The fallout has been widespread, with major tightening in lending criteria and an absence of cheap debt to finance real estate and private equity deals. Several players have stepped into the morass eager to make the most of a bad situation. Included among them are hedge funds seeking to pick off leveraged loans from the balance sheets of banks at low prices where they can arbitrage the difference between the strong underlying credit of the debt and its current discounted value. The mezzanine debt players are also emerging as winners as the repricing of senior debt tranches has made the mezzanine pieces far more attractive. So talent that grew up during the debt years in real estate and are comfortable deep into the capital stack will be getting a lot of attention. ! The impact of the "Black Friday of the credit markets" will be felt for several months to come. Resumes of credit-related talent are on the streets in abundance. ! Professionals with expert credit skills or individuals from large, structured finance platforms will be sought after by new players such as hedge funds or private equity players. 2008 Expectations ! Mezzanine debt providers will take advantage of the repricing of certain tranches in the capital stack. More funds will be raised to take advantage of the dislocation in pricing of credit pointing investors into mezzanine. ! Hedge funds will step into the financing gap for leverage buy-out activity created by tighter credit policies. Funds will be raised to take advantage of the leveraged loan inventory now on the books of large banking institutions. 30 Real Estate Investing! continued CONVERGENCE 2007 Trends This was the year of convergence: hedge funds in real estate, real estate in private equity, private equity in hedge funds. As capital continued to pour into the alternatives arena, few wanted to settle for their traditional piece of the pie. With the need to put large slugs of capital to work, large public REITs became very attractive, although entity-level valuation creation also became very appealing – particularly when the parts are far more valuable than the whole, as in the Blackstone/Equity Office Properties Trust acquisition. For hedge funds, real estate became another alpha generator in the never-ending search for absolute return. ! The talent shortage for senior managers, which has its roots in the early 90s in real estate, has been further exaggerated by heavy capital flows of the last three years. The most vulnerable platforms are those that have not locked in key employees with long-term wealth creation vehicles. Key employees at these shops are being targeted by hedge fund and private equity platforms which can provide very attractive future earnings streams. ! The more diversified and the more global platforms become, the more they need professional managers who can provide intellectual and cultural leadership, process-oriented decision making and the ability to manage the risks of a business that is moving at top speed. The execution risk associated with warp-speed growth is the single biggest challenge facing an industry that has been historically dominated by entrepreneurial management styles. ! Outside the C suite, we have seen continued demand for acquisition professionals who cannot only source deals in a demand-driven market but have the ability to execute the deal. ! Asset managers also are in high demand as generating return comes more from repositioning properties than turning them over. ! Capital-raising professionals continue to be in high demand this year, as they were last year. With the amount of investor capital flowing into this asset class, everyone wants to get their fair share. 2008 Expectations ! The management talent supply-demand disequilibrium in real estate will continue as platforms diversify and become more complex. Retention strategies will become a primary concern of human resource professionals, particularly at large platforms. Firms that have not adopted compensation plans with some component of carry will continue to have key employees poached. When all other strategies are considered, carry and other long-term wealth creation compensation plans are the most effective retention tools for key contributors. A popular alternative to carry among larger financial institutions is a plan that invests a portion of cash compensation on a matching basis in a 31 Real Estate Investing! continued ! basket of funds. It is a plan that can be offered not only to investment professionals but to significant contributors as well. 32 Infrastructure Wanna Buy a Bridge? 2007 Trends Infrastructure has all the components today's institutional investors look for: strong returns, capacity to absorb significant amounts of capital and global investment possibilities. So it is no surprise that 2007 was in many respects infrastructure's global debut? Long time a favorite investment allocation in Australia, infrastructure became a popular investment in the United Kingdom and in Europe in the late '80s and '90s. But not until the Chicago Skyway deal was completed in 2005 did the idea of privatization of public assets take hold in the United States. But take hold it did: In the last few years, U.S. pension funds have allocated more than $50 billion to infrastructure investment. At least 50 percent of these deals were done by private equity investors. In fact, mature infrastructure is the ultimate convergence between private equity and real estate, mixing the returns of opportunistic equity investments with the low earnings volatility of real estate. ! The talent demands are widespread and varied. Search work has been extensive for individuals at real estate firms, investment banking, capital markets and private equity firms with expertise in property, transportation, energy and telecommunications. ! Candidates are increasingly scrutinizing potential employers. Firms that are viewed as being more opportunistic across a wide variety of sectors (rather than specializing) and those that are willing to provide funding (debt and/or equity) in projects/companies that are in different stages of development are seen as the most desirable. ! International deals (Latin America, Africa, the Middle East and Eastern Europe) also have been active over the last several years so experienced professionals who have put together a successful track record not just in closing deals but in navigating across complex cultures and political environments are at a premium. ! With the German Landesbanks losing its credit rating advantage, we also have seen some migration of talent from the public finance sector, becoming attracted by higher compensation and responding to the opportunity presented by the lack of professionals with technical skills and experience with public finance platforms. 2008 Expectations ! With the dramatic allocations to infrastructure by pension funds, the surge in demand for talent will continue as more funds are created and will put to work significant amounts of equity. The overhang of capital in the market is extreme so the demand will continue to outstrip supply, forcing fund managers into broader, more global hunting grounds. 33 Private Equity Transactions Are Slowing, but Strategic Hires Continue at a Healthy Pace 2007 Trends ! Recent turmoil in the credit markets has moderated the torrid deal pace seen earlier in the year. New deal announcements have slowed, transactions are taking longer to close and some deals are repricing or failing to close. Firms are slowing the hiring of investment professionals aimed at adding deal execution capacity. However, strategic hires in an effort to enter a new business or build a new function continue in earnest. ! The private equity industry has raised record amounts of capital in the last year. As funds grow larger and in some cases are more complex, firms are building internal fundraising and client service capabilities. Middle-market focused firms are increasingly adding a seasoned professional to focus on investor relations, and larger funds are consistently adding talented people to already established marketing groups. ! Prices and valuation multiples of buyout transactions have continued to increase during the last year. More and more firms are looking to build value in portfolio companies through operational enhancements and prudent M&A strategy. Many firms have either initiated or further built internal operational enhancement groups and/or senior advisors to help with operational issues within portfolio companies. In addition, firms are continuing to add human capital professionals to optimize the recruitment of talent into the firm and, in some cases, into portfolio companies. ! U.S. firms, especially the larger ones, continue to increasingly deploy capital and launch new funds in overseas markets. Private equity in the emerging markets, such as China and India, remains a hotbed of activity. The hiring of investment professionals to support this activity remains strong. ! The private equity fund of funds business is increasingly competitive, with winners relying on a clear advantage, such as access to attractive investments, fundraising advantages and long and successful track records. 2008 Expectations ! With recapitalization dividends and liquidity events from financial engineering or outright sales increasingly limited, firms will focus more on driving returns through operational enhancements to portfolio companies. ! Larger funds, in an effort to seek stability in the face of a potential U.S. economic downturn, will continue to expand globally and diversify their product mix. Distressed funds will continue to be a focus area for investor capital. ! Increased debt costs and tighter lending standards have reduced investment gains through quick recapitalizations and will have a dampening effect on buyers' bidding capacity. As a result, quick 34 Private Equity! continued investment gains that have yielded significant carried interest distributions, at all levels of private equity firms, will be more difficult to come by in 2008. ! The industry's record-breaking capital raising has led to management fee revenue increases at many private equity firms. Heightened buying and selling has increased transaction fees. While that has yielded modest, firm-wide compensation (base and bonus) increases at many firms, the increases often remain concentrated within the founding partner ranks, or used for other purposes. In many cases, increased management fee revenue is used to hire new investment talent or otherwise grow the firm. ! In the middle market, firms with flexible capital and who are able to invest across the right side of the balance sheet, will be best equipped to put capital to work in today's uncertain environment. ! In the larger-cap buyout world, those firms with global, diversified investment strategies will be able to attract, pay and retain the best talent. ! Strong credit skills will be more highly valued in this next cycle, as workouts and value investing replace growth capital as the flavor of the day. 35 Canada Canada Reaching beyond Borders 2007 Trends ! Whether it be pension plans, insurers, banks, or independent money managers, Canadian firms have increasingly been directing their attention outside North America. This manifests itself differently among the financial services pillars and the functions concerned. ! For many years, along with their banking counterparts, Canadian insurers have managed money for their own business, as well as for clients. This year, they made greater strides in marketing to both retail and institutional investors. Internationally, like their bank counterparts, attention continues to turn to the United States, Europe, India and China for future asset growth. ! After the lifting of foreign content rules in 2006, numerous international money managers entered the Canadian market. This year, they have been developing their relationships with consultants and institutional investors. Both foreign players and Canadian independents have faced steeper competition from large Canadian banks and insurers that have made considerable product and distribution inroads. ! As the Canadian market opened to international investments, some domestic money managers have adapted by developing and offering more international products. This has increased demand for portfolio managers with sector and industry expertise across geographies – not only into the United States but also into Europe and Asia/Pacific. ! After a record two years of recruiting and absorbing private equity talent, plan sponsors and independent money managers have focused their efforts to investing at home and abroad. In particular, plan sponsors have made significant direct investments in infrastructure and private equity within Canada and internationally. ! While smaller plan sponsors have continued to outsource investment management to third-party money managers, large plan sponsors have grown in assets under management and size of operations. This increased complexity in the scale and scope of operations and the introduction of risk budgeting methodology has resulted in lasting demand for investment professionals with international, quantitative and asset allocation experience. ! In retail distribution, regulatory change resulted in the creation of Independent Review Committees (IRCs) by mutual fund companies. Once established, these committees function independently of the parent company. Members with investment, legal and financial skills and an appreciation for the firm's operating environment are in demand. ! There was continued activity in risk and compliance, with particular movement in the mutual fund industry. As insurers focused more on third-party wealth management, this resulted in greater 37 Canada! continued demand for talent in technology and operations to support asset administration and client reporting. 2008 Expectations ! Most employers are anticipating continued hiring growth into 2008, and we expect a continuation of several of the above-mentioned trends. However, the repercussions of recent industry developments remain to be seen, including the potential for constriction or consolidation in some segments. 38 Mexico Mexico Competition and Consolidation Increase 2007 Trends ! The private pension industry in Mexico was ripe for change, prompting authorities to rewrite the rules of competition in order to focus more on returns. These regulations now will concentrate on fee generation from assets under management, thereby raising the bar as clients shift and jostle for the retirement funds (Afores) providing the best returns. ! The tightened competitive environment casts a gloom over small Afores that recently entered the market. These players will not be able to generate the necessary asset volume to survive, forcing a wave of consolidations with larger Afores. In this environment, even mid-sized players with sufficient assets under management may seek to merge with competitors to lower costs. ! Private equity and real estate funds continue to be hot areas in the Mexican financial sector as foreign investors perceive ample opportunity from economic stability and markets still in developmental stages. Opportunistic buyout and real estate funds that have been eagerly recruiting talent with local knowledge and networks now are almost fully staffed. Other stakeholders will take center stage, further straining an already scarce talent pool. ! Investment funds – an increasingly mature industry in Mexico – continue to consolidate in an effort to cope with lower margins by leveraging operational costs. ! With the implementation of new rules for private pension systems, the largest and most advantageous Afores will seek to improve their competitiveness by offering better returns and by lowering operational costs. Consequently, executives with global investment capabilities are increasingly sought, while financial professionals with sales and marketing experience, although still in demand, will see their appeal weaken. ! On the private equity front, core fund infrastructure already is in place so demand is shifting from investment executives to operational professionals who can provide value-added execution of strategies for portfolio companies. In particular, clients seek CEOs and CFOs with sector- and industry-specific experience. ! In real estate, core fund infrastructure also is well established. Senior fund management now is shifting its focus to talent downstream in project management and asset management functions. Pressure to attract talented project and asset managers is further heightened by the Mexican government's emphasis on developing large infrastructure projects. As key investment players within the market bid for new and already operating government concessions, demand for quality project and asset management will continue to grow. 40 Mexico ! continued 2008 Expectations ! After Afores change their commission schedules in response to regulatory changes, there will be a shift in demand toward managers who can exploit the new flexibility of the investment scheme (five siefores). Those with experience in global markets and with more sophisticated financial instruments will be particularly prized. ! Talent in asset and wealth management will remain scarce through 2008 on all fronts, thus continuing the upward pressure on compensation seen throughout 2007. ! Consolidation within pension and investment funds will continue unabated. ! The shift of emphasis from the sales to the investment function is here to stay. Those entities with the best distribution and marketing capabilities as well as those able to leverage operations will be the winners in this new environment. In private equity, talent will be needed to supervise and participate in the operation of invested companies. Real estate also will need operators. The market will have to pay a premium for talent with infrastructure/project management experience. ! Industry- and sector-specific corporate officers will continue to be highly sought by private equity and real estate funds. ! There are no hedge funds operating in Mexico, but market rumors circulate about investors who want to launch initiatives. 2008 will probably be the year in which hedge funds make their debut. 41 Europe United Kingdom U.K. General Management Continuing Strength in the Hiring Market 2007 Trends ! Notable corporate developments within the U.K. investment management arena in 2007 include the proposed merger of Resolution and Friends Provident, in which Resolution Asset Management would be potentially consolidated into F&C Asset Management and the management buyout of Jupiter Asset Management. High-profile IPOs within the investment management industry have continued, including the flotation of Polar Capital Partners, although market instability in the second half of 2007 reportedly caused several firms to defer listing until 2008. Nonetheless the listings that have occurred have led to increased corporate officer recruitment. ! Volatility prompts increased focus on risk management. The temporary closure of funds after the August squeeze in liquidity left a lasting impression on the risk management community. During the past five years, there have been only a few times when the role of risk manager has been as important as it was during this past summer, when both bond and equity markets experienced significant swings. Furthermore, investment performance of more esoteric fixed income products, including mortgage-backed securities, asset-based securities and collateralized debt obligations reinforced the need for stringent risk management. ! European pension funds' appetite for diversification has increased demand for currency management, as it steps up from a tactical asset allocation strategy to an asset class in its own right. ! Sustainable and responsible investment and climate-change themed products grew in popularity, with numerous product launches catering predominantly to the wholesale market. These products are perceived to be a safe haven in times of turmoil and are expected to enjoy long-term growth. ! The appetite for real estate, which saw several REIT product launches in early 2007, dropped in the latter half of the year, and consensus predictions are for more challenging times in the near term as 2007's credit crunch dampens growth in the sector. ! Emerging markets equities – particularly in Brazil, Russia, India and China – have survived market instability relatively well and continue to attract institutional appetite. ! The Middle East continues to be a region of interest when hiring specialist distribution capability. 2008 Expectations ! While economic indicators remain mixed, there is an expectation of some cooling off following the bullish markets of the last three years, with a potential dampening on 2008 compensation, particularly in some areas of fixed income. 44 U.K. General Management!continued ! Alternatives, commodities and ethical investments are expected to continue to grow and continue to be an area of heated recruiting as investors diversify their portfolio holdings. Real estate markets, which saw strong performance over the last two years, remain volatile and 2008 hiring is expected to be more subdued. ! Demographic trends and impressive wealth creation by Russian and Middle Eastern investors will continue to fuel interest in investment managers and asset gatherers with experience in these regions. Demand is coming from family offices, endowments and mass affluent channels. 45 U.K. Investments and Investment Research Equities and Multi-manager Offerings Have Led the Way in Hiring Activity 2007 Trends ! On the equities front, the past year has witnessed several senior U.K. and European equity portfolio manager moves as firms seek demonstrable track records in these asset classes. ! Emerging markets equities – particularly in Brazil, Russia, India and China – have survived market instability relatively well and continue to attract institutional appetite. ! The trend for multi-manager offerings continues strongly, as open architecture platforms are built alongside direct investment businesses. ! The U.K. market also witnessed a proliferation of socially responsible investing (SRI) and environmental equity-themed products issued by both boutique and bulge-bracket investment managers, designed as a long-term portfolio diversification tool. ! Within both traditional fixed income and equity environments, the first half of the year saw investment managers prioritize higher risk strategies with a move away from benchmarked/core products to more absolute return and structured products. Recent market uncertainty may result in some pulling back from these fixed income strategies, and in the short term we anticipate downward pressure on bonuses and some layoffs in the mortgage-backed securities/collateralized debt obligation arena. ! Given the volatility in credit markets during the second half of 2007, hiring within the distressed debt and leveraged loan arena remains tentative at best. Interestingly, the current market turmoil may provide opportunities for buy-side firms to consider sell-side talent in 2008. Emerging markets debt and currencies, both hard currency and local, continue to be key areas of expansion in 2007. ! 130/30 funds have been presented as the new hot product for 2007 but are yet to be tested for performance. Many 130/30 funds have underperformed in the short term, calling into question their appeal for institutional asset managers. Furthermore, 130/30 will continue to challenge the skill of long-only portfolio managers to successfully manage multiple portfolios, especially during periods of market volatility. ! Buy-side sector research analyst opportunities continue to attract candidates from both buy-side and sell-side, with the latter principally favoring a move to hedge funds. 46 U.K. Investments and Investment Research!continued 2008 Expectations ! Global and emerging markets equities are expected to continue their momentum from a hiring perspective in 2008. ! U.K. institutional and retail appetite for SRI-themed/renewable energy investments is expected to remain strong, with further investment managers expected to launch new products in 2008. ! 130/30 products, which aim to bridge the gap between traditional long-only products and hedge fund products, also are expected to gain traction. 47 U.K. Sales, Marketing and Distribution Institutional Sales Talent a Continuing Priority 2007 Trends ! As in 2006, seasoned institutional distribution professionals are still in high demand. This is true for traditional asset management firms, investment management boutiques, managers of managers, hedge funds and funds of hedge funds. As a result there is a shortage of experienced and proven sales talent and compensation expectations have gone up commensurably. ! Traditional asset management firms are taking a more segmented client-focus and product approach, building sales teams that work closely with product specialists and consultant relations professionals. At smaller investment management boutiques, founders often still play an important role in raising assets. ! Multi-managers have seen an increase in demand for their products from local governments and mid-sized pension funds that wish to have a diversified product range. As a result, and to reduce the cost of outsourcing multi-manager and fund of funds products, many asset management firms are hiring their own internal multi-manager teams. ! Increasingly hedge funds and funds of hedge funds are focusing on institutional clients and consequently, they have turned to the traditional asset management firms to find salespeople with the appropriate client network and necessary gravitas. ! Several new U.S. asset management entrants into the U.K. and European markets have begun hiring teams to cover these regions from London. As a result, demand for talented self-starters in distribution has increased. ! There is a continued increase in demand for product specialists to complement generalist sales teams, and in many of the larger firms, heads of product specialists and heads of consultant relations teams increasingly serve on Distribution Committees. 2008 Expectations ! Demand for successful consultant relations professionals will continue. Consultants are increasingly becoming important also in the alternatives arena as well, as they are growing their presence in the institutional market. ! Single-strategy, fund of funds and traditional asset management firms from the United States continue to set up distribution offices in London to cover U.K. and European institutional clients hence demand for proven asset gatherers is anticipated to remain strong. 48 U.K. Sales, Marketing and Distribution!continued ! As emerging markets begin to mature and appetite for international asset management products increases in these markets, demand for business development professionals who know the emerging markets region will grow. 49 France France Talent War Still Rages despite Stock Market Glitch of August-September 2007 Trends ! Asset management hiring remains unusually active at the senior level in equities, emerging markets, infrastructure/financial technology and alternatives (particularly in funds of hedge funds, private equity and real estate, the market darling for the past year). ! The long-only world has been disproportionately troubled by the credit/subprime crisis. However, money markets, traditional bonds and structured credit activities have seen a slowdown in hiring, except at very senior levels (CEO, CIO and product specialists), where the need to maintain morale and strategic direction in uncertain times is critical. ! Both emerging-markets and European equities are a hot recruiting segment that has seen numerous senior-level hires. ! The flight to boutiques is still continuing due to their attractive reward structure and greater sense of ownership and autonomy. They are riskier environments, however, and, in the current environment, a reverse migration is expected, especially in alternatives. ! Bulge-bracket firms have realigned or redesigned their organizational strategies away from centralized models and toward multi-boutiques. But this will demand a strong sense of common brand, values and vision. ! Leadership and management issues are top of mind for CEOs as they seek to inspire, motivate and provide vision to teams of increasingly specialized technicians with varied backgrounds. ! CIOs with vision, human resources leaders with broad strategic impact (and a seat on their current management board) compensation and benefits specialists, and risk/compliance and infrastructure professionals are highly sought after and at increasingly senior levels. For the three latter categories, a talent shortage is forcing firms to look beyond their competitors. Similarly, firms are going outside their field and comfort zone when seeking CEOs and board members. ! On the distribution side, institutional marketers, more than retail/wholesale, are in demand at the most senior level and with the broadest possible geographical remits. Firms are turning to Benelux, Scandinavia, Eastern Europe and southern Europe as well as, increasingly, the Middle East for managers to serve pension funds, banks and insurance clients. ! Alternatives are still able to draw talent but not unquestioningly. Last summer's events have made specialists nervous and while senior marketers and analysts still command significant premiums to move to single-strategy hedge funds or fund of funds, candidates are exercising more caution when contemplating departure from investment banks or the long-only world. 51 France! continued ! Interestingly, new Swiss and U.S. entrants and established midsized players are still looking to invest in France, and high-quality firms are successfully attracting senior talent despite their limited local presence. ! On the wealth management side, the talent war rages more than ever, with musical chairs on both the team and individual levels as people are poached from consulting, mid-cap advisory and law firms. This has been accelerated by the emergence of a new breed of advisors and private bankers, often within newly formed boutiques, who are looking to gain market share and differentiate their "trusted advisor" approach in the eyes of the owners/leaders of mid-sized and family businesses. ! Confident of the path ahead, CEOs of wealth advisory businesses are taking time to readjust their human resources, hiring and retention policies and to refine their understanding of client-centric models (for example, building a broader, more holistic dialogue for family issues). Information technology systems and processes and risk management tools also are being upgraded significantly, pulling talent from other "best of breed" industries/sectors. 52 Germany Germany A Growing Market Intensifies Demand for Sales Professionals and Credit Portfolio Managers 2007 Trends ! The year 2007 has seen a very active talent market within Germany's investment community. Demand has been consistently high for both and sales and marketing and product specialists. Senior asset managers on the equity as well as the fixed income side (particularly credit and structured credit portfolio managers) have been in high demand. Recruiting activity has been high across the entire range of firms, from niche shops to alternative boutiques to established and well-known players in the German market. ! There is strong demand for socially responsible investing products and for incorporating sustainability funds into investment portfolios. This is mostly driven by international players. ! The German wealth management market is still in a growth mode and thus is both very challenging and highly competitive. International organizations such as ABN's Delbrück Bethman Maffei, UBS, Credit Suisse Asset Management, Sarasin, Pictet and Lombard Odier are increasing their reach into the local German market. These international players are fighting hard for market share against big local firms such as Deutsche Bank, Sal. Oppenheim, Trinkhaus & Burkhardt and Berenberg. As a consequence, top asset gatherers on the private banking side with quality client contacts are a scarce resource in great demand. ! With Fortis having acquired the asset and wealth management business of ABN AMRO, there is a new and sizable player in the market looking to further build on ABN's existing platform. At the same time, the industry will be watching closely to see how this integration unfolds on both the strategic and tactical levels. ! Top senior institutional and wholesale talent remains scarce, with recruiting activity having been heavy throughout 2007. ! Clients are demanding liability-driven investment solutions, leaving little room for pure product- driven sales efforts. This is a consequence of evolving corporate governance standards and changing legislation that has created a demand for value-added products and services as well as for sales solutions for fund management specialists in asset management organizations and investment banks. 54 The Netherlands The Netherlands The Quest for Absolute Alpha 2007 Trends ! Influenced by regulators, institutional investors continued to adopt liability-driven investment strategies. Currently, only the larger funds such as PGGM separate alpha and beta within their portfolios, but a growing percentage of the midsized funds are preparing to follow suit. ! Strategic asset allocation strategies are including new investment ideas and changes in risk tolerance. Institutional investors have become more receptive to using alternative investment products like exposures to commodities, emerging markets, real estate, timber, private equity, catastrophe bonds or climate-linked products. ! Total return or absolute return strategies (130/30, multi-asset, etc.) that strive for pure alpha, rather than the traditional outperformance against benchmark strategies, have become an increasingly important part of overall internal investment strategies. ! Fiduciary management strategies have grown in importance. New providers of fiduciary services have entered the local market. Due to the increasing complexity of the investment landscape, more pension funds are looking to outsource their investment activities to a fiduciary manager with which they have a strategic partnership. It is still too early, however, to evaluate the success of this strategy. ! Corporate social responsibility/socially responsible investing (CSR/SRI) products and strategies have become important due to growing expectations from governments, the public and the media. In addition to traditionally "green" funds, many general asset managers have also introduced specialized CSR/SRI funds. Allocations to micro-credit finance funds have accelerated, with ABP Pension Fund doubling its exposure in this class. ! Real estate as an asset class is still growing strong in terms of professionalism, popularity (number of funds available) and diversification (regional, long/short, etc.). ! Due to active public relations campaigning and positive media coverage, private equity firms, their role in the economy and their effect on the companies they acquire now are regarded in a more favorable light. ! There has been a tremendous increase in shareholder activism by both hedge funds and pension funds, with the ultimate example provided by the letter The Children's Investment Fund sent to the 56 The Netherlands! continued management board of ABN AMRO in February 2007, eventually resulting in the sale of the largest financial institution in the Netherlands to a consortium of three other banks. ! The Holland Financial Centre was launched as a new initiative to promote the Netherlands as an international financial hub. All key representatives from the Dutch government, banking, insurance, pension and investments are participating in this high-profile initiative. Regulatory changes and initiatives by the Dutch National Bank have resulted in the Netherlands emerging as a serious competitor to countries like Ireland and Luxembourg as the preferred location for cross- border asset pooling. 57 Asia/Pacific Australia Australia Strong Growth in Total Assets and Consolidation Continues 2007 Trends ! In the first half of 2007, superannuation assets in Australia exceeded AUD$1 trillion. ! The government's introduction of simplified superannuation reforms (simple super) to reduce the taxation complexity and further encourage savings above the 9 percent compulsory level led to very substantial inflow into funds, especially because one-off contributions were allowed prior to the June 30 end of the tax year. ! Because of the substantial improvement of the attractiveness of superannuation assets for retirees (with earnings and withdrawals completely tax-free after age 60), a large amount of individual discretionary assets, such as property and individual share holdings, has either been exchanged for or moved into superannuation accounts. ! Self-managed superannuation accounts have accounted for a disproportionate share of the growth since these accounts bring a number of advantages for investors with larger balances and the sophistication to act as their own trustees. ! The four major trading banks account for a significant portion of the total superannuation assets under management, but they have followed quite different paths. Westpac and Commonwealth Bank own significant asset management divisions in their own right, while National Australia Bank outsources the "manufacturing" aspect to external managers, and ANZ uses a joint venture with ING. ! The other major sector that aggregates retail superannuation funds is the industry fund sector; at least two of these now have AUD$20 billion in assets under management, and further consolidation in this sector is expected as individuals are able to freely move their funds and economies of scale become more apparent. ! An increasing proportion of assets has been directed to offshore and alternative funds. Infrastructure and global property as well as hedge funds have been featured in asset allocation of the new funds inflow as the performance of global equity markets has tended to converge internationally and as investors continue to look for outperformance. ! The Australian funds management business at the individual level is still very advice dependent, with financial planners directing a large proportion of the funds inflow. The Australian Prudential Regulatory Authority has increased its resources and efforts to scrutinize the conduct of planners and self-managed funds trustees. 60 Australia!continued ! Although private equity has participated in the successful takeover of several medium and large listed Australian companies, institutional investors blocked similar attempts for Qantas and Flight Centre, showing an increasingly proactive voice in major corporate actions. ! Australia entered the government wealth funds management sector, creating the Future Fund to move federal government budget surpluses into a dedicated fund to cover the retirement liabilities of Commonwealth public servants. The Future Fund houses AUD$60 billion in assets and is projected to fully fund the outstanding liabilities within the next three years. ! Both the Future Fund and the State of Victoria's public sector fund manager, Victorian Funds Management Corporation, are adopting an investment philosophy separating its alpha and beta investment operations. They are using low-cost index tracking managers (including some in-house capability) to generate overall market returns, placing their risk budget with a range of external managers that promise potentially higher returns. ! There has been greater movement of senior investment professionals and teams among fund managers this year than in prior years. The continuing trend of well-regarded investment professionals forming boutiques shows no signs of slowing. Perhaps the most visible acknowledgement of this is the recent announcement by Westpac that it plans to partially divest its asset management division (BT Financial) to provide equity participation to the investment group's management. 61 China and Hong Kong China and Hong Kong Continued Demand for Both Local and Global Talent 2007 Trends ! The asset management industry in Asia continues to experience significant growth fueled by several key factors, including rising sovereign institutional and private wealth in the region, the increasing pace of pension reforms in Asia and the diversification needs of global investors. Total assets under management in the Asia region exceeded U.S. $2 trillion, up from U.S.$1.2 trillion a year ago. South Korea, Taiwan, India and China have led asset growth. ! The equities markets in China and Hong Kong became focal points for investors in 2007. As of mid-October 2007, Chinese stocks have more than doubled in value from two years ago, the Shanghai Composite Index topped 6000 for the first time, and the combined market value of China's Shanghai and Shenzhen exchanges reached U.S.$3.7 trillion. In addition to foreign investment, local Chinese investors continued to pour their savings into the home market. The local regulatory authorities are considering doubling the QFII quotas to meet demand. The liberalization of QDII, allowing Chinese financial institutions as well-qualified retail investors to invest through authorized Chinese financial institutions in selective overseas financial instruments, continues to drive growth in the Hong Kong stock market. ! With its U.S.$1.4 trillion of reserves, the government formed a new investment entity, China Investment Corporation (CIC). The anticipation that a significant portion of CIC's U.S.$200 billion sovereign wealth inflow will be invested in the Hong Kong exchanges along with assets from retail investors is driving the Heng Seng Index, H-Share Index and the RedChip Index to unprecedented levels. Sovereign wealth funds from Asia and the Middle East have become new and powerful players in the global markets. ! New entrants and continued expansion of the existing players in both traditional and alternative asset managers have contributed to explosive demand for office space and talent, beyond even the frenzied levels of the '90s. In the traditional asset management arena, new entrants from the United States, Europe and the Middle East have established regional hubs in Hong Kong or Singapore. Among alternatives, hedge funds have tended to set up shop in Hong Kong, while private equity and real estate have clustered in Beijing and Shanghai. ! The overseas subprime problem has little visible impact on the Asian hedge fund and asset management markets, given the bias of Asian investors, particularly the retail and private banking segments, toward equities. ! Hong Kong remains a key regional hub for the industry. Established firms found that growth brought complexity and established new senior positions with expanded regional responsibilities, including COOs, chief credit officers, CFOs and specialized sales or marketing-related professionals. There also were numerous changes at the CEO level. 63 China and Hong Kong!continued ! The high turnover – more than 50 percent – of sales and marketing professionals in 2006 continued into the first half of 2007. Both traditional houses and hedge funds are driving demand for investment research talent. ! New entrants in the real estate and private equity segments experienced growing demand for professionals with both deal sourcing and execution skills at the director and managing director levels. ! The war for talent underway in the asset and wealth management industry in Asia is exacerbated by the growth in the financial services sector as a whole. The banking and insurance sectors, for example also are experiencing unprecedented growth at a time when a senior cohort is retiring. That multiple sectors are feeding from the same talent pool has led to greater flexibility by talent managers and a steady stream of professionals switching fields. Investment banking professionals have long been favored targets for private equity and hedge fund players; real estate developers have lost talent to the real estate investment communities. Banking and insurance firms consider COOs, CFOs and CTOs from the asset management industry and vice versa. Private banks have drawn investment management salespeople as well as investment professionals from the asset management industry. 2008 Expectations ! Asian mutual fund performance delivered stellar double-digit returns across the region on a year-to- date basis with the equities markets in China, Hong Kong, India, Singapore, Malaysia and the Philippines outperforming most developed markets. Therefore, we expect firms will establish increased investment/research presence and relocate product development managers and asset allocation strategists to the region. ! While the Chinese fund management industry, with RMB2 trillion, is still a closed market, it has seen significant talent turnover in the last year. Many portfolio managers – some say up to 40 percent – have left for the private sector and its higher and more flexible compensation. The coming year will determine whether local fund houses will step up and change the compensation system to compete with the private sector. 64 China and Hong Kong!continued ! The recently announced easing of restrictions by the Hong Kong Securities and Futures Commission regarding the appointment of overseas investment managers by local fund houses is expected to draw more international talent to locate to Hong Kong. 65 India India Sustained Growth Builds Pressure on Supply of Talent 2007 Trends ! Steady growth in GDP of 7 percent to 8 percent continues, supported by sustained liberalization of the economy. This has driven strong inflows of foreign investment into the country, reflected in buoyant capital markets and a positive business outlook for corporate and financial services players. ! The asset management and wealth management space has seen significant activity with many international players entering the market. During the last few months, both AIG and JPMorgan have launched their AMC operations and a half-dozen other global players are at varying stages of approvals or launch. UBS acquired the asset management business of Standard Chartered Bank. ! Given the rapid expansion of the industry, firms are having difficulty building and retaining their teams. The increasing demand for experienced portfolio managers and compliance, sales and distribution talent has led to firms to adopt multi-pronged strategies to meet their personnel needs. Recruiting strategies include hiring candidates from more mature geographical markets, repatriating Indians living abroad and recruiting candidates from non-traditional sources such as research and retail banking into these areas. ! Hedge funds and private equity players have increasing interest in setting up local offices as the Indian stock markets are seen as a key investment destination. Offering higher compensation and greater autonomy, hedge funds have had success recruiting top-tier fund managers from the asset management world, and private equity firms have brought people in from elite consulting firms. ! The real estate business has been opened up to foreign investment. This has led to an explosion of real estate funds (from Morgan Stanley, Merrill Lynch, Blackstone, GE and others), bringing the associated demand for professionals who understand the Indian real estate markets. The shortage of professional talent is accentuated by the fact that the real estate market in India historically has not been a career destination for quality financial talent. ! Private banking still is developing as an industry in India, moving from financial planning to the more sophisticated portfolio of products and services found elsewhere. As with real estate, this is a new growth area, with demand for experienced and qualified private bankers far outstripping supply. 2008 Expectations ! Demand for asset management professionals across the investment and sales functions is likely to continue to rise, fueled by the launch of Indian asset management firms by Dawnay Day, AEGON, Shinsei, Mirae and some local players like Edelweiss and Peerless. Some existing players 67 India!continued may see consolidation through tie-ups with strategic partners (for example, Robeco with Canara Bank Mutual Fund). ! Real estate is expected to see an increased level of activity, with global and local funds likely to start making serious investments. Demand for CIOs, asset managers and business development staff in both funds and services companies is expected to grow rapidly. ! Indian investment professionals abroad will continue to return home, particularly to seek opportunity in asset management and real estate. ! Pension funds and REITs are likely to receive regulatory approval, further driving demand for talent across the board. 68 Japan Japan Recovery Continues as the Market Heats Up 2007 Trends ! The Japanese economy is booming, with most analysts expecting growth to continue at least though the beginning of the year. As elsewhere, however, the subprime loan implosion has cast long-term uncertainty. ! Despite this upturn, both retail and institutional investors have been beset by a lack of opportunities for absolute returns, with the downturn in global credit markets exacerbating the problems at home, particularly for traditional investors. As a result, both domestic and foreign asset managers are beginning to roll out more alternative investment products (AIP) such as leveraged hedge funds, REITs and private equity funds, targeted to pension plans. UFJ Trust Bank is planning to introduce a hedge fund of funds and Sumitomo Mitsui Asset Management is planning to increase its AIP allocation from ¥32 billion to ¥50 billion. Sumitomo Trust & Banking Co., meanwhile, has ¥180 billion allocated to alternatives, with 70 percent of that going to hedge funds. ! The increased visibility of hedge funds could lead to their acceptance as an allowed asset class for investment of government funds. This could be a large opportunity for hedge funds, either through a gradual acceptance of hedge funds or fund of funds as an asset class by the government or through hedge funds focusing on corporate restructuring in Japan. 2008 Expectations ! 2007 is ending with an increase in activity in terms of new entrants. We expect to see a couple of large, high-profile foreign start-ups in Japan by year-end. We take this as an encouraging sign for the market. The rapid development of a range of investment styles and options will continue to make competition fierce among foreign and domestic players. There will continue to be an increase in alternative investment products, hedge fund activity and mutual fund players. ! Distribution channel still plays a vital role in Japan, as Japanese investors are starting to develop more interest in alternative products and have a larger appetite for risk. Hedge funds will continue to be a topic of controversy in Japan, but the market is more favorable than ever before. . 70 Singapore Singapore The Bullish Outlook Continues 2007 Trends ! Like 2006, this year continued to see a steady stream of U.S. and European investment management firms setting up shop in Singapore, attracted by a mix of factors including investor demand, an attractive tax and regulatory environment, a well-functioning legal and a higher quality of life compared with other regional alternatives. Singapore also has emerged as a favored hub for firms wishing to consolidate their regional back- and middle-office operations. ! The separation of research from portfolio management accelerated. Investment management firms want portfolio managers to focus on managing money and constructing portfolios without the distractions of overseeing a research operation. Many firms now have regional-based research hubs supplemented with local research in countries where they have a presence. ! High investor demand combined with high potential return have compelled both new entrants and existing players to either build or add to their emerging markets fixed-income businesses. There has been considerable demand for emerging market bond and currency portfolio managers and analysts, as well as credit portfolio managers and analysts (although demand for these last two positions has dropped somewhat following the late summer turbulence). ! The expanding number of market entrants combined with market growth have led to a considerable demand for sales and marketing professionals in both the institutional and retail spheres. Smaller firms attempting to cover both areas are finding it hard to locate individuals who can do both, even when they are addressing the retail markets via third-party distributors. ! Many investment management firms are setting up their own internal multi-strategy hedge funds or balanced funds in an attempt to increase risk returns from uncorrelated investments. This has been prompted by the both the promise of higher returns and the need to retain talented staff attracted to the growing hedge fund industry, which is increasingly taking talent from traditional money managers. ! Competition for talent also is being fueled by the rapidly growing private banking sector, which is hiring investment officers, client service and marketing staff from the asset management arena. Sales staff professionals often are seen as having the right skill sets to become private banking relationship managers. 72 Looking Ahead Optimistic with a small "o." ! We approach 2008 with selective optimism. On one hand, we believe that as long as investor capital continues to pour into certain strategies, particularly alternatives, firms will expand into new areas. On the other hand, capital could move to the sidelines if the markets trend downward for a prolonged period of time. ! Recruiting at large, long-only platforms will be driven by the need to retool their current organizations in favor of alpha generation and talent who can provide solutions addressing retirement and liability management needs. ! Alternatives boutiques will require a greater number of professional managers who can direct their teams to generate high returns for investors while minimizing execution risk that often accompanies aggressive growth into new markets and new strategies. ! Several questions remain to be answered: – Are the retooling and talent upgrade initiatives complete? – Will a market slowdown expose opportunities to invest in displaced talent? – Has the impact of the subprime meltdown largely been recognized? The answers to these questions will set the stage for hiring in 2008. Stay tuned . . . 73