Alternative asset managers: An opportunity to profit from an overlooked super trend

Embracing Swensen’s compelling arguments for allocating more to alternative assets, institutional investors, like the Future Fund, are steadily increasing their allocations to private equity, infrastructure, private credit and other alternative assets.

According to data from Preqin, the median allocation to alternatives of global public pension funds has increased from 18% in 2010 to 30% in 2020. 

Unlike liquid markets, where allocations can be made quickly, it takes time to “get set” in alternative assets. Many institutional investors are still well below their alternative allocation targets and it will take years for them to reach their objectives - which is good news for established alternative asset managers. But it is not only institutional investors who are seeking to invest in alternatives. Family offices, high net worth investors and retail investors are all seeking to do the same. This presents a massive fundraising opportunity for alternative asset managers with global scale, diversified platforms, and a proven track record in an increasingly competitive market.

The investors who are alive to this super cycle stand to make very strong investment returns by investing with some of the alternative asset managers best placed to take advantage of this seismic shift in investing.

Until recently, alternative asset managers operated as “boutiques” or private firms normally owned by the founding partners. However, over the last decade, a number of alternative asset managers have listed and are scaling to sizes that were unimaginable a decade ago. Examples of some of the leading listed alternative asset managers that have achieved global scale are:

As at 31 March 2021 except Partners Group (31 Dec 2020)

1. Ares Management was first formed in 1997 and spun out independently from Apollo Global Management in 2002.
2.  Date of relisting from AMEX to NYSE by Brookfield’s predecessor company, the Brascan Corporation. In 2005, Brascan changes its name to Brookfield Asset Management.
3. KKR completed its merger with publicly traded investment affiliate KKR Private Equity Investors on Amsterdam Euronext in October 2009. KKR relisted to the NYSE on 15 July 2010.
4. Market Capitalisation as at 07 June 2021.

Of the alternative asset managers, Blackstone has scaled to be the largest in scale and scope. Although its share price has surged over the past few years, we think the business will continue to grow at 15% per annum through a combination of organic growth and strategic acquisitions.

When Blackstone successfully completed its IPO in June 2007 it had “just” $83 billion in assets under management (AUM). Fourteen years onwards in 2021, AUM has grown almost 8 times to $649bn.

Blackstone paid what seemed like a handsome price for alternative credit manager GSO. It paid an up-front payment of $635 million for a $10 billion AUM business back in 2008. But the acquisition was perfectly timed with the Global Financial Crisis credit market dislocation and, fast forward to today, the GSO business (recently renamed Blackstone Credit) has grown to $160 billion in AUM (35% of overall AUM). Giving some sense of just how fast a business can scale within the Blackstone fold, GSO now generates over $600 million in base management fees alone and is one of the largest and most dominant alternative credit platforms in the world.

In 2013 Blackstone acquired Strategic Partners, Credit Suisse’s private equity secondary fund business. At the time Strategic Partners were investing their fifth fund which closed at just under $3 billion in 2012. In the five short years Strategic Partners has been within the Blackstone stable, they have raised two successor funds and over $15 billion.

Using cash and its own listed units, Blackstone has a very strong currency with which to make more strategic acquisitions that can be quickly scaled when integrated into the Blackstone platform.

Blackstone – Acquisitions Since IPO

I believe the secular demand for alternative assets will persist in the low-rate environment and continue to disproportionately benefit the established leading asset managers who have scaled investment platforms, deep client relationships and are able to deploy significant amounts of capital across multiple strategies.

This rise in global alternative asset managers is a super trend investors are not going to want to miss out on. 

---