Finding Value in Alternative Asset Managers
This structurally attractive and generally misunderstood industry offers investors opportunities in a fairly valued market.
We believe that the alternative asset management industry is structurally attractive and generally misunderstood by investors. The relative newness of the industry to the public markets, not to mention the complexity of its accounting, has kept many from looking at the group more closely. We also believe that investors do not fully appreciate the business quality or growth prospects for the biggest and best alternative asset managers, which have, in many cases, greatly expanded beyond their initial roots in private equity. The sell side has made some attempts to value the industry using a modified sum-of-the-parts model, but we think that this methodology only adds to the confusion as it deeply undervalues incentive income and relies too heavily on accrued incentive income (which, in our view, is too volatile a metric to be useful). We believe a discounted cash-flow model that relies more on distributable income is a much better way to value the industry. We present a report on the industry that seeks to answer some of the biggest questions that investors might have about the group, including how best to evaluate the industry's competitive advantages.
What Is the Alternative Asset Management Industry?
The publicly traded alternative asset managers are global institutions with decades of experience investing in nontraditional asset classes, primarily by managing money for private and public pension funds, endowments, foundations, and other institutions, as well as for high-net-worth individuals. Most of the industry's largest players--including Blackstone (BX), Apollo (APO), and Carlyle (CG)--started off in private equity, but have expanded their reach over time to include credit, real estate, secondary funds, and funds of funds. Other players--like Oaktree (OAK) and Ares (ARES)--have focused almost exclusively on credit opportunities (distressed, high-yield, convertibles, mezzanine) with great success. The industry has tended to follow the same business model for going public, structuring themselves as partnerships (which file K-1s), with the investment managers themselves listed as the general partners, and investors in their funds designated as limited partners. Investor interest in the products being offered by the alternative asset managers has increased since the 2008-09 financial crisis, with pension funds--many of which have turned to riskier and higher-returning assets during the past 10-15 years in an attempt to close funding gaps--leading the way. In particular, we think that private equity performance has helped increase the level of interest in alternative assets, as returns for the top quartile of private equity funds at 26% and 29% over the past 10 and 20 years, respectively, versus single-digit returns for the MSCI World Index over the same time frame, have contributed to a substantial increase in the AUM for the industry overall during the past 20 years. Given the level of interest that still exists for alternatives, we expect continued healthy levels of growth in AUM for the industry overall going forward.
Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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