Traditional asset management groups are rushing to expand their alternative investment offerings as they seek to boost profitability and avoid competition from private equity giants.
More than a dozen groups known for their mutual funds and exchange-traded funds each said they managed at least $100 billion in alternative assets at the end of last year, up from nine groups five years ago. years. Their ranks include BlackRock, Invesco and PGIM.
They and others grow rapidly, often by acquiring other specialists. AllianceBernstein last week announced plans to grow its alternative assets to nearly $50 billion with the purchase of CarVal Investors, and Franklin Templeton expects to exceed $200 billion after completing its acquisition of Lexington Partners in April.
At BlackRock, where alternative investments under management have more than doubled in five years to $265 billion, chief executive Larry Fink told shareholders this week that he plans to “accelerate growth. . . in private markets” were at the heart of the group’s strategy.
“Asset managers are tackling this space [because] their investors demand it,” said Ju-Hon Kwek, head of asset management consulting at McKinsey. “Investors are fighting for allocations to high quality private market strategies. Everyone wants more. »
Fund companies focus on private lending, real estate, infrastructure and equity in private companies, all areas where institutional clients have increased their allocations in recent years. A recent Prequin survey found that 86% of sponsors intend to invest the same amount or more in private equity this year.
Fund managers are also hoping to capitalize on an expected flurry of interest from high net worth retail clients seeking stable long-term returns at a time when bonds and stocks have been volatile. Some envy the success of alternative managers in introducing products for the very wealthy, such as the property and credit funds launched by Blackstone, the world’s largest private equity group.
“Penetration in the institutional circuit is already quite high. There’s a lot more room for allocations in the wealth management channel to grow,” said Rob Sharps, managing director of T Rowe Price, which bought alternative credit manager Oak Hill last year. “Blackstone is tapping huge demand and other people will try to compete for it.”
Globally, alternative assets surpassed $15 billion and 15% of total assets under management (AUM) last year, and that is expected to reach $22 billion and 16% by 2025, according to a recent report from the Boston Consulting Group.
Adding alternatives is also a way to increase revenue at a time when other fees are compressing and mutual funds cannot assume that new money will increase management fees. Net flows into long-term US mutual funds have been negative for seven of the past eight years, according to the Investment Company Institute. Some of that money has been invested in exchange-traded funds that do much the same thing, but they tend to charge lower fees.
Alternatives, on the other hand, continue to charge higher management fees and have the potential for performance-based fees. BCG said alternatives accounted for 42% of industry revenue and that would rise to 46% by 2025.
“The pressure on mutuals is that there is no flow. There are going to be periods when the markets are down. You have to diversify and that’s why [they] are buying alts,” said Peter Kraus, the former head of AllianceBernstein, who runs Aperture, a new asset management firm.
Traditional asset managers feel well placed to offer alternatives to the wealthy investors they serve either directly or through financial advisors.
“Clients want someone who can understand their collective needs,” said Greg McGreevey, chief investment officer at Invesco, where alternative assets under management approach $200 billion. “Being a broad-based company that can do liabilities as well as alternatives gives us a leg up in the wealth management space.”
There are obvious risks in buying into alternative managers as prices rise rapidly. Fund groups used to buy traditional rivals for well under 1% of assets under management. AllianceBernstein paid more than 5% for CarVal.
“There are a limited number of very strong pedigree teams with a track record and a lot of interest out there,” said Matt Bass, managing director of AllianceBernstein, adding that he expects to benefit from the agreement by reducing the cost of capital for the small business and helping it grow.
Cultural fit can be an issue. Alternative groups pay their employees differently from traditional managers: they rely heavily on performance and the amount can be exponentially higher.
“Different compensation structures attract very different types of people and they don’t necessarily coexist naturally,” said Jay Horgen, managing director of Affiliated Managers Group, which has been investing in alternative strategies for years. AMG avoids potential conflicts by avoiding full acquisitions and taking stakes in individual asset managers who remain independent and are managed separately.
Other companies say they think the clashes are manageable because all employees understand the need to attract new revenue. “In fact, the broader business is excited to see these new alternative businesses grow because we’re all shareholders,” said Shane Clifford, senior managing director of alternative strategies at Franklin Templeton, where alternatives now account for nearly 10% of the AUM.
The other big risk is that alternative products aimed at retail fail to deliver the strong and stable results that investors are looking for. Recent research from Morningstar found that retail-focused alternative funds generated lower total returns over the 15 years from 2007 to 2022 and were more correlated to stock market funds than a traditional bond fund would. ‘would have been.
Still, Morningstar CEO Kunal Kapoor is optimistic. “Historically, the companies that focused the most on launching alternatives weren’t best-in-class. What’s happening now is that the parents who come in are some of the best, so the results will probably be much better,” he said.