The financial services industry is adapting– from finding ways to bridge liquidity gaps while market activity has slowed, to balancing competing market messages on ESG, and integrating AI into business practices. Read more for key financial services trends, the outlook for 2025 and sector matter highlights.
Key Financial Services Trends and Developments
- Growth in the registered fund industry continues to shift from mutual funds to exchange-traded funds (ETFs). Most large mutual fund managers have launched, or are launching, ETF families. Growth of transparent, actively managed ETFs has accelerated. In addition, managers of less-liquid assets, including private equity, private credit and real estate, continue to launch registered closed-end funds to attract retail investors.
- In private funds, capital raising has continued for certain general partners (GPs) and in certain sectors, though overall activity has decreased and the time to raise new funds has increased.
- Continuation funds have become a popular way for GPs to provide liquidity to investors, support high-performing assets and bridge gaps until the market allows the next flagship fund to be raised. Secondaries activity has increased too.
- ESG has settled into a new normal. The backlash continues, but a substantial portion of the market still wants ESG products, and advisers are finding ways to balance these two competing imperatives.
Factors Shaping the Sector:
- Efforts by players in various industries, including financial services, to limit the authority of administrative bodies have taken hold. The U.S. Supreme Court overturned its precedent requiring courts to defer to regulatory agencies, limiting the authority of regulatory bodies, including the Securities and Exchange Commission (SEC).
- Growth in the permanent capital space, and in particular private credit vehicles, continued in 2024 and is anticipated to be much the same for 2025.
- Courts have become more willing to overturn regulatory initiatives based on a narrower reading of statutory authority, a finding that an agency did not conduct the proper cost-benefit analysis or similar grounds. A similar court challenge on the validity of the SEC’s “Dealer Rule” was recently successful, calling into question the future regulatory treatment of certain large securities trading entities.
- The U.S. Securities and Exchange Commission’s proposed Private Fund Adviser Rules, announced in August 2023, were vacated in June 2024 after a court challenge questioned the SEC’s statutory rule-making authority. The rules would have dramatically changed how private funds and their advisers operate.
- The European Commission released the second iteration of the Alternative Investment Fund Managers Directive, or AIFMD II, which will have a significant effect on credit funds. It introduces rules for funds that originate loans and includes liquidity management requirements for open-ended funds.
Outlook for Financial Services in 2025
As interest rates in the leading financial markets decline, the expectation is that increased economic stability will follow. This should lead to more deal activity, resulting in capital being returned to investors, who will need to redeploy that capital. Consequently, expect a steady return to fundraising activity and new fund launches, which may increase in momentum throughout 2025. The current trend of market consolidation will likely continue; therefore, there will be asset manager M&A activity such as GP-stake sales.
Crypto, Digital Assets and AI
Though elements of Congress believe crypto does not require its own regulatory framework, a bipartisan coalition appears to be emerging in favor of a legislative solution, evidenced by the passage of the Financial Innovation and Technology for the 21st Century Act in the House earlier this year. It is possible a bill may also pass in the Senate, leading to a new statutory framework for crypto- and blockchain-based assets.
The SEC is taking notice of proposed legislation and may shift on some of its positions on crypto, but so far has not abandoned its overall framework. There is, however, also a distinct possibility that under the new Trump administration, the SEC may, either on its own or with the U.S. Commodity Futures Trading Commission, begin to consider a new crypto regime that is materially different from the existing regulatory regime for traditional securities.
Artificial intelligence (AI) is working its way into the asset management industry. In some instances, AI will simply become another routine technology tool integrated into business operations. But some asset managers are researching and launching products that will likely use AI more substantively to manage clients’ money. In 2025, a variety of industry uses for AI may emerge.
Dechert advised 21Shares, a leading issuer of crypto exchange-traded products and developer of blockchain technology, on two pioneering ETP launches: its 21Shares Core Ethereum ETF (CETH), and an inaugural Bitcoin ETP, which it issued with ARK Invest, an investment manager focused on investing in disruptive innovation. Dechert's lead role builds on its sterling track record in helping funds broaden access to both traditional finance and blockchain-based investors. A cross-practice team advised on both product launches.