Asset owners prefer specialists for alternatives portfolios

Money managers offering both traditional and alternative investment strategies are continuing their push into alternatives, but Pensions & Investments' search and hire data reveal they are not gaining assets as rapidly as firms that specialize in alternative investments.

Alternatives such as private equity and hedge funds, once considered niche investments, now are close to mainstream, with resulting larger allocations. And more recently, some private debt and credit investments have been finding their way into investors' fixed-income portfolios.

Only 6.9% — or 301 of 4,385 alternative investment hires tracked by P&I — were of traditional multiasset class managers between Jan. 1, 2010, and May 15 of this year.

In dollar terms, traditional managers received $33.6 billion of the total of $365.9 billion in alternative investments mandates during the same period.

This analysis is based on P&I reports, which reflect only a fraction of asset owners' investment activity. Among the investment strategies included in the alternative investment categories are real estate, real assets, private equity, hedge funds and active currency.

Blackstone Group raised the most capital during the period, with a combined $19.2 billion from 126 commitments. Apollo Global Management was next, collecting a total of $8.2 billion from 39, followed by TPG Capital LP with $8 billion from 52.

For traditional managers, Neuberger Berman Group LLC garnered the most alternative assets — more than $3.25 billion from 29 commitments during the period. Second was Pacific Investment Management Co., with $2.55 billion from 18, and J.P. Morgan Asset Management with nearly $2.16 billion from 28.

And despite institutional investors' move into alternatives, traditional managers that only recently began offering alternative strategies have not been among the top 10 alternative managers in P&I's annual money manager rankings.

Some traditional firms have remained top managers in alternative investment asset classes, but with slow growth rates. For example, while Morgan Stanley Investment Management has been on P&I's top 10 real estate manager list, it has only gained a bit more than $1 billion in real estate assets since 2004. In comparison, Starwood Capital Group LLC's AUM grew 255% to $12.4 billion in the 10 years ended Dec. 31, pushing it to 10th in AUM among real estate managers.

The manager shuffle in private equity has been one of the most dramatic.

WestAM, the asset management arm of German bank WestLB, was third on the private equity list in 2004 but is no longer in business. (Private equity firm Siguler Guff & Co. LLC acquired WestAM's private equity funds-of-funds business in 2009.) Ares Management LLC, the fourth largest private equity manager on P&I's list of private equity managers, raised its first funds as an independent firm in 2003 and 2004.

“When alternatives were new, allocations were small, there were few providers and no one had deep track records. So it was safe to go to a brand-name provider that investors had a pre-existing relationship with,” said David Fann, president and CEO of San Diego-based private equity consulting firm TorreyCove Capital Partners LLC.

“Now, allocations to alternatives are large, there are many providers and track records are quantifiable, so it's all about performance and alpha generation,” rather than choosing traditional managers with familiar names that investors know, Mr. Fann said.

In this new race to gain assets and stay relevant to institutional investors, some large multiasset class managers have taken a multiboutique approach.

For example, Prudential Financial — through Prudential Real Estate Investors, the nation's first institutional real estate manager — and Principal Real Estate Investors, subsidiary of Principal Global Investors, have expanded into other alternative investment asset classes either organically or by acquisition. They then let those boutique subsidiaries maintain a degree of autonomy, executives at the parent firms say.

Prudential's alternative investment AUM was $51.2 billion at year-end 2014, up 388% from Dec. 31, 2004. Principal's alternative assets, totaling $13.7 billion at the end of 2014, were up 111% from year-end 2004.

The advantage of the multiboutique model is that successful money management “takes a village,” said Barbara A. McKenzie, chief operating officer of Des Moines, Iowa-based Principal Global Investors.

BlackRock, which has also been creating internal boutiques for its alternative investment businesses, grew even more rapidly between 2004 and 2014 — 483.5%, with $14.3 billion in alternatives. In 2004, BlackRock only offered hedge funds. By 2014, company officials had added real estate, infrastructure and commodities.

The boutiques “can hook into our product development team, product management and risk group, and can bounce ideas off of operations leaders. We have a lot of in-house resources within our structure to help them get where they need to go,” Ms. McKenzie said.

“A smaller alternatives team all on its own ... will not necessarily have that available to them,” she added.

Mr. Fann said that at the same time, many alternative investment money management groups once affiliated with large financial institutions have spun out as independent firms, “usually due to compensation and governance reasons.”

These new boutiques helped accelerate the shift of the alternative investment business to specialty firms from large traditional, full-service money managers.

For example, private debt and credit manager Crescent Capital Group LP, Los Angeles, doubled its AUM since it spun off from TCW Group four years ago, noted Mark Attanasio, Crescent co-founder and managing partner. Crescent had $17.5 billion under management as of March 31, up from $8.5 billion as of Dec. 31, 2010, the day before the split.

Crescent executives separated from TCW in part to provide executives with long-term ownership incentives, Mr. Attanasio said.

TCW's alternatives AUM dropped 51.4% to $4.4 billion in the four years ended Dec. 31, 2014.