Publicly traded alternative investment managers are expanding beyond their original limited partner base of institutional investors, buying insurance companies and expanding into retail.
The recent moves are aimed at increasing assets under management overall as well as boosting the percentage of AUM in so-called permanent capital. Until relatively recently, these permanent capital strategies included long-lived private capital funds and publicly traded vehicles such as business development companies and real estate investment trusts, all of which provide consistent management fees while reducing managers' fundraising costs.
Permanent capital is on the rise among publicly traded private equity firms.
For instance, over the 12 months ended June 30, Apollo Global Management Inc. reported total AUM growth of 33% to $414 billion, 60% of which is in permanent capital vehicles. Most of the permanent capital is from its insurance vehicles, Athene Holding Ltd. in the U.S. and European insurer Athora Holding Ltd., with assets under management of $165.1 billion and $60.2 billion, respectively.
In 2012, Apollo had $25 billion in permanent capital, amounting to 22% of its total AUM.
It's an open question whether these changes help or hurt institutional investors. With managers developing these new relationships, institutional investors could have less clout in negotiating terms when managers have other pools of capital on which to draw, industry experts said. The moves also could increase the potential for conflicts of interest, they added.
One potential conflict could be that public company shareholders tend to focus on asset and revenue growth as well as short-term profits, said David Fann, vice chairman of alternative investment consultant Aksia LLC. Institutional investors, however, focus on long-term risk-adjusted returns.
"One obvious concern is whether the fund manager is raising too many overlapping and competing products vs. focusing on investing and maximizing profits for their existing investment vehicles," he said. For example, if the manager creates similar products for both retail and institutional investors, how are its best investment ideas allocated among vehicles, he said. "Allocation policies and fair treatment for each of the vehicles are a few of the many issues investors need to make sure they understand."
Due diligence is critical but it has become more time intensive, especially as managers' AUM has grown, he said