Alts firms see most growth over quarter

Managers of alternative investment strategies experienced the highest growth in assets under management in the year ended June 30 among 25 publicly held money managers, Pensions & Investments' analysis of second-quarter earnings reports showed.

In what analysts and money management CEOs called a tough quarter, private equity and private credit managers also dominated AUM growth in the quarter.

KKR & Co. LP's assets increased 28.8% for the 12 months, to $191 billion, and was up 8.5% for the quarter. It attributed the year-over-year growth to $40 billion of new capital raised.

In rank order by AUM growth for the year ended June 30, KKR was followed by The Carlyle Group, up 23.5% to $210 billion; J. The Blackstone Group LP, 18% to $439 billion; Ares Management LP, up 16.7% to $121 billion; and Apollo Global Management LLC, rising 16.2% to $269.5 billion.

Carlyle Group said in its earnings statement that its private equity AUM of $81.2 billion as of June 30 was a new peak for the firm, an increase of 49.5% from the end of the second quarter 2017.

The second quarter of 2018 was "a challenging quarter for the industry," one in which many publicly held asset managers experienced weak inflows and "fee rates that missed expectations," said Michael J. Cyprys, executive director and a research analyst specializing in coverage of brokers and asset management in New York-based Morgan Stanley's institutional securities division.

Morgan Stanley has "a positive view on alternative investment managers," however, because these firms are in a "better position relative to traditional managers to benefit from secular trends" among asset owners to increase private market investment and consolidate investments with fewer managers, Mr. Cyprys said.

Higher performance fees typical of private equity and credit strategies also benefit alternative managers, putting them on an "upward trajectory" compared to traditional managers, he added.

More broadly, P&I's analysis of the 25 publicly owned money managers that reported earnings through Aug. 2 found that in the quarter ended June 30:

• Eleven firms reported growth in their assets under management, one company's AUM was flat and 13 firms experienced a decline.


• AUM growth in the quarter among the 25 managers ranged from 8.9% to -7.1%.


• Net revenues were positive for 13 companies and flat for one firm, while 11 managers saw revenue losses.


• Ten managers had net inflows and 13 experienced net outflows. Two companies — Blackstone and Northern Trust Corp. — do not report net asset flows.

Manager results were better overall in the year ended June 30:

• Twenty-two firms reported growth in their assets under management, while assets of three managers declined.


• Asset changes in the 12-month period ranged from 28.8% to -9.5%.


• Net revenues were positive for 18 companies and negative for seven companies.

From BlackRock Inc.'s perspective, institutional investors were responsible to a large degree for changes in its broad asset classes, Laurence D. Fink, the New York-based firm's chairman and CEO, told analysts on a July 16 call.

BlackRock reported assets of $6.299 trillion as of June 30, a slip of 0.27% from the prior quarter and up 10.7% from a year earlier.

Net inflows to the firm's long-term strategies were $14.5 billion in the three months ended June 30, down 73.4% from $54.6 billion the prior quarter and down 84.5% from $93.5 billion in the second quarter of 2017.

Mr. Fink said on the call that redemptions by institutional investors were "substantial" and inflows were "muted" because many were taking profits by reducing equity exposure while others were derisking their portfolios by moving assets into bonds and out of equities through liability-driven investment approaches.

London-based BrightSphere Investment Group LLC — previously known as Old Mutual Asset Management — also attributed some of its net outflows of $4.1 billion in the quarter ended June 30 to institutional investors' changing preferences.

For example, net outflows continued for BrightSphere's U.S. equity strategies, with $3.9 billion in the three months ended June 30, following net outflows of $1.6 billion in the first quarter and net outflows of $2.8 billion in the year-earlier period.

On an Aug. 2 conference call with analysts, Aidan J. Riordan, BrightSphere's executive vice president and head of affiliate management, said net outflows from U.S. equity strategies managed by the firm's investment affiliates, particularly from passive and large-cap value strategies, were the result of "secular trends."

Those trends include redemptions by institutional investors such as corporate pension funds derisking their portfolios, regular rebalancing activity and reaction to performance challenges, Mr. Riordan specified. "We regard these flows as normal," he added.

BrightSphere's AUM as of June 30 was $234.3 billion, down 2.4% from the quarter ended March 31 and down 9.5% from a year earlier.

The company's decrease in assets year-over-year reflected the divestment of $32.4 billion managed by real estate manager Heitman as of June 30, 2017, the firm's earnings statement said. BrightSphere sold its stake to Heitman management in the second half of 2017.

For many managers, the lure of alternative investments is powerful not only because these strategies carry higher fees but also because demand is high from institutional investors.

"Many institutional investors are reducing their equity investments and moving into alternatives, which carry higher fees," said Michael Falk, a partner at Focus Consulting Group LLC., Long Grove, Ill., a consultant to money managers.

"In terms of improving profit margins, alternatives are most additive for managers, followed by equities and then fixed income," Mr. Falk said, noting that "over the last 12 to 18 months, a lot of conversations with our publicly held manager clients have been about strategy."

Many of the CEOs or chief financial officers of the money managers P&I tracked during the earnings announcement period through Aug. 2 expressed the importance of alternative investments to their existing businesses during calls with analysts.

For example, despite lower net inflows of $2.6 billion into alternative investment strategies compared to earlier quarters, Affiliated Managers Group Inc. is seeing strong interest in these strategies, said Jay C. Horgen, the firm's CFO, during a July 30 conference call.

Mr. Horgen said the flows into liquid and illiquid alternative strategies was roughly equal in the second quarter, but he stressed commitments to illiquid strategies in July already exceeded the total in the second quarter.

Boston-based AMG's assets under management totaled $824.2 billion as of June 30, down 0.8% from the prior quarter and up 6.8% from a year earlier.

Other money managers were explicit about their intent to buy alternative investment specialists to expand their spectrum of private market strategies.

Steven H. Belgrad, BrightSphere's president and CEO, told analysts during an Aug. 2 earnings call that the firm is in active discussions with potential acquisition targets. He said BrightSphere is on the lookout for alternative investment managers, including credit and real estate specialists, and has set aside up to $400 million for deal-making through the end of the year.