AGM Alts Weekly | 3.17.24
AGM Alts Weekly | 3.17.24
AGM Alts Weekly #43: Making private markets more public, every week.
👋 Hi, I’m Michael. Welcome to my weekly newsletter, the AGM Alts Weekly. Every Sunday, I cover news, trends, and insights on the continuing evolution and innovation in private markets. I share relevant news articles, commentary, an Index of publicly traded alternative asset managers, job openings at private markets firms, and recent podcasts and thought pieces from Alt Goes Mainstream.
Join us to understand what’s going on in alts so you and your firm can stay up to date on the latest trends and navigate this rapidly changing landscape.
Good morning from DC.
What do your car loan, your Klarna-financed washing machine, and the financing for your new solar panels all have in common?
They all fall under the ever-expanding umbrella of the private credit universe, where alternative asset managers are playing a much bigger role in ultimately financing the end consumer as banks pull back from certain lending activities, as Chairman, CEO, and Co-Founder of $29B AUM Palmer Square Capital Management Chris Long said this week on his Alt Goes Mainstream podcast.
Aspects of this topic, amongst others, were discussed on a panel that I moderated at SuperReturn Private Credit in London last week, featuring some of the most active credit and institutional investors in Europe: James Ruane of CDPQ, Richard Roberts of Arrow Global, Matthew Potter of Pollen Street Capital, and Reji Vettasseri of DECALIA.
This week, there also happened to be a flurry of private credit articles, shining the spotlight on a rapidly growing corner of the private credit world: asset-based finance (ABF).
A $40T addressable market
ABF represents a massive market and opportunity, in large part due to a structural change in finance. Alternative asset managers are stepping in to fill the gap vacated by banks. As reeling banks recover from the blows of rising interest rates and regulatory headwinds, alternative asset managers have swiftly filled the void. KKR’s 2023 deal with PayPal to purchase up to €40B in European pay-later receivables hammers home this point.
At an event last month hosted by the Economic Club of Washington, D.C., Apollo CEO Marc Rowan highlighted this evolution in the credit world, saying, “Everywhere in the world, people are choosing more from the investment marketplace, less from the banking system.”
Apollo’s March 2024 Investor Presentation does well to illustrate Rowan’s assertion about the secular trend of debanking.
Private credit used to represent a very specific area of the fixed-income world: middle-market sponsor lending. That wasn’t a small market by any means. Preqin measured private debt AUM to be a $1.5T addressable market as of December 2022. However, private credit has become a much larger part of private markets. Apollo’s investor presentation measures the opportunity in private credit to be a $40T addressable market, ranging from auto loans and residential mortgages, to equipment finance, aviation finance, railcar leasing, and even music royalties.
In the process, asset-based finance has risen to prominence. It is an increasingly integral part of the market in which alternative asset managers are playing. A chart from a recent Wall Street Journal article by Matt Wirz highlights just how much alternative asset managers have crept into banks’ territories by completing large-scale asset-based finance deals.
What is asset-based finance?
Asset-based finance is a departure from what many would have previously characterized private credit to be: loans to middle-market companies. ABF is loans or credit products that, as KKR says, “finance[s] the real economy.”
KKR offers a characterization of ABF that illustrates just how far-reaching this market is, extending into a consumer’s life in a multitude of ways:
Consumer and mortgage finance is the largest part of the market. Generally, we're investing in secured loan portfolios. They may be secured by real estate in the case of mortgages or cars in the case of auto loan portfolios, to name two examples. We have also focused on home improvement loans and other secured portfolios of loans to prime borrowers, such as recreational vehicle (RV) loans.
Commercial finance includes a lot of lending that banks used to do but have pulled back on of late. Typically, that involves loans to commercial borrowers secured by their essential assets. Activate Capital, where we help provide financing to Irish homebuilders, is an example of that. As another example, we’ve made investments backed by trade receivables for a large hardware manufacturer.
When we invest in hard assets, we actually own and control the underlying assets, which we think can offer a degree of downside protection. Those assets typically generate lease income, generally over a relatively long period of time. Aviation leasing or single-family rental homes are examples of this.
Contractual cash flows are a little more off the run. As an example, the music royalty space is an area where we’ve been active. We like this segment for its attractive income profile and the lack of correlation with the wider economy.
Apollo also offers an illuminating description of ABF and why it’s so critical to the economy.
Asset-backed finance (ABF) is a critical tool for financing day-to-day activities for millions of businesses and consumers globally. It comprises a broad set of credit types that touches everyday life from residential mortgages, credit cards and student loans, to planes, trains, automobiles, and more, collectively making up a $20 trillion-plus market today. While the growth of private credit has largely focused on corporate credit, we see ABF as a rapidly growing asset class that we believe is the natural progression of private credit.
ABF: a growing market
The ABF market is large — $5T — and growing, according to data from KKR.
This market is growing for good reason. The characteristics of ABF — secured assets that offer portfolios of cash flowing assets — are appealing to investors. These portfolios of credit assets have downside protection, and many alternative asset managers are able to both buy these types of assets from banks, who need to sell them due to regulations or challenging liquidity positions, or step in and fill the void left by banks to be the new capital provider by buying assets directly from specialty finance platforms.
Investor demand is also a reason for growing interest in ABF. Apollo’s characterization of private investment-grade credit highlights both the how and the why of who is funding private credit. Their webpage on this topic states: “Much of this credit is funded by the investor marketplace — insurers, mutual funds, institutional investors and the like — which we believe promotes financial stability thanks to its diversified nature and de-leveraging effects.”
Apollo notes the importance of the “investor marketplace,” highlighting how firms like themselves can match the credit they originate with a more diverse pool of capital.
Apollo posits that this greater access to credit fuels growth in the real economy, creates a de-leveraging effect as credit leaves the banking system, and helps generate investment income for a growing population of retirees.
Private markets are eating the world
Alternative asset managers marching into the world of ABF is yet another example of their increasing importance in the world of finance.
It’s firms that were formerly seen as private equity shops, occupying a sliver of the global financial services world across equity and credit, that are now financing consumers on one side (with their growing private credit businesses) and enabling them to invest into private markets on the other side (with their LPs that range from insurance companies, captive insurance businesses like Apollo’s Athene and KKR’s Global Atlantic, to the global wealth channel). These firms have created marketplaces, as Apollo’s Marc Rowan has stated, which are where investors and borrowers are choosing to go to access capital or investment opportunities.
We talked last week about how alternative asset managers are, in fact, marketplaces themselves. While we would do well as an industry to not be blind to the potential risks posed by increasing involvement by alternative asset managers in the consumer credit and ABF spaces, as well as the possible concentration of capital in a select number of larger alternative asset managers, Apollo’s analysis of the important role that private credit can play in growing the economy in a diversified, sustainable way does highlight how critical these alternative asset managers, or marketplaces rather, will be in matching assets with the right type of investor capital to help both borrowers and investors alike.
In some respects, Apollo represents the epitome of a marketplace. They’ve chosen to buy an insurance company, Athene, which has enabled them to match the right investments they originate via their 16 origination platforms with private credit investments that can serve as a fixed-income replacement. Co-CIO John Zito stated in a Pensions & Investments interview that a good portion of the firm’s AUM resides in asset-backed investments. They’ve also bought stakes in a number of originators and notably acquired ATLAS SP Partners, formerly Credit Suisse’s Securitized Products Group. Zito calls it “one of the most innovative transactions [Apollo has … done] as a firm.” ATLAS provides asset-backed warehouse financing, forward flow and asset purchases, and capital markets and distribution services across a wide range of asset classes within residential and commercial real estate, and corporate and consumer debt. ATLAS primarily originates high-quality, investment-grade assets that are highly desirable to a broad range of investors and also fit well within the balance sheet needs of Apollo-owned Athene and other retirement services companies, which hold virtually all of their assets in investment-grade credit.
Does this mean private markets are eating the world? Only time will tell, but certainly, alternative asset managers are playing a larger role in financing the economy and a consumer’s financial life, with ABF turning into a growing and critical portion of this activity.
AGM Index
AGM has created an Index to track the leading publicly traded alternative asset managers.
Some of the industry’s largest alternative asset managers are publicly traded — and their net inflows can serve as a window into how private markets are being perceived by investors and allocators who are allocating capital into alternative investments.
Note: AUM figures are based on fee-paying AUM where applicable.
AGM News of the Week
Articles we are reading
📝 Private Credit Has Had Its 15 Minutes of Fame | Shuli Ren, Bloomberg
💡Bloomberg Opinion’s Shuli Ren talks about private credit losing steam as investment banks reclaim market share. Ren cites increased activity in the junk bond market and leveraged buyout lending as evidence that private credit funds face headwinds after years of success. With the looming possibility of a rate cut sometime in 2024, Ren believes lower interest rates may put a squeeze on private credit funds. The premium that private credit funds charge will have to come down, eating into their returns. As a result, syndicated loans and high-yield bonds are seeing a revival. For B or B+ rated loan issuers, the total spread — including upfront fees — dropped to 385 basis points in January, the lowest in three years. This has meant a meaningful cost saving to the tune of up to a few hundred basis points compared to direct lending.
The yield compression in direct lending calls into question where private credit funds will look to generate returns. Ren offers up an increasingly popular area of private credit as the new favorite: asset-based finance. ABF, which includes lending activities like credit card receivables, is intriguing to investors due to the downside protection afforded by the asset-backed nature of the investments. Insurers are particularly excited about the nature of asset-based finance. They are looking for high-quality assets which ABF products can provide. The February sale of about $1.1 billion worth of credit card debt by Barclays to Blackstone’s credit and insurance division is one signal that this market is beginning to heat up. It also could mean that banks are starting to regain a foothold in other areas of private credit as alternative asset managers grow their presence in the ABF market.
💸 AGM’s 2/20: Private credit may have had its 15 minutes of fame, but I’d say its death is greatly exaggerated. For a few reasons, that is. Sure, it’s possible that certain corners of private credit, like direct lending (as Ren notes), may be losing ground to the very banks that alternative asset managers took business away from in the past. But, business is booming in other areas of private credit, such as asset-based finance. Atalaya Capital Management projects that ABF could grow to over $900B in the next few years, up from $350B today. The ABF market is showing signs of progress that would suggest that growth is on the horizon. Many of the industry’s largest alternative asset managers have thrown significant resources and capital behind the space. Apollo made a huge acquisition in 2023, acquiring Credit Suisse’s Securitized Products Group. With 1/3 of their firm’s AUM in asset-based finance, this is far from a small portion of their business. Investors like ABF too. At the time of the acquisition, Apollo’s Deputy CIO of Credit, John Zito, called ABF “the next big evolution of this market.” These types of investments also make for the right product fit for insurance / annuity investors, some of whom are now captive to private equity firms. Zito said as much in a recent interview with Pensions & Investments, highlighting how big this business is for Apollo: “It's always been very big. It's providing capital to the entire economy. So it's mortgages, financing cars, financing any sort of real estate. Receivables finance, solar finance. You name it, it touches the economy, we're probably providing capital. The banks have historically provided that capital, and insurance companies have provided that capital. And so historically, it's set within those balance sheets. Our retirement service business is growing really quickly. And so today we're $450 billion, $300 billion of which is our own balance sheet. And of that $450 billion, about a third is asset-backed, which is what I'm describing. And the other two-thirds, the other $300 billion, is our corporate business.” Given the size and scale of opportunities to finance the consumer, I certainly wouldn’t bet against increased involvement from the large alternative asset managers in this space.
📝 Blackstone Says Time to Buy Real Estate as Price at Bottom | Laura Benitez and Dawn Lim, Bloomberg
💡Bloomberg’s Laura Benitez reports that Blackstone President Jon Gray believes it’s a great opportunity to buy real estate assets. Gray shared his views on Bloomberg Television in an interview with Francine Lacqua in Rome, where he said, “The perception is so negative and yet the value decline has occurred, so when you get into this bottoming period that’s when you want to move.” Gray said he sees a wave of buying opportunities going forward as banks and insurance funds may have to sell real estate assets at a discount. He notes that there hasn’t been significant competition to buy discounted assets thus far, but as financial institutions begin to deal with the impact of losses from loans that were made when borrowing costs were lower, he believes there will be a need for new capital. Gray remarked that they are “seeing the cost of capital start to come down, spreads are starting to tighten and new construction is coming down dramatically.” Blackstone has recently become active in the real estate market. They bid on the $17B portfolio of Signature Bank debt in the FDIC’s sale, which was on the market after the bank collapsed in March 2023. Gray thinks that it’s a “good time before rates come down” to be active in the real estate market. Gray also noted that a bottoming real estate market would be beneficial for their $60B real estate trust, BREIT. “As rates start to come down and the Fed at some point starts to cut, as well as the lack of new supply — that should be more constructive for commercial real estate, and we think that will be a positive for BREIT,” Gray said. Despite the excitement Gray has in real estate from seeing things on the front lines, he noted that the fundraising environment is a bit slower on the institutional side than it is for other investment strategies, like private credit and secondaries.
💸 AGM’s 2/20: When one of the world’s largest asset managers says they are excited about real estate, it’s worth paying attention. The macro environment, in large part due to the increase in rates, has had a major impact on commercial real estate, causing existing holders of real estate assets to be sellers at discounted prices. Blackstone’s Gray appears to be optimistic about allocating capital in the current environment, citing that certain signals appear to be a positive sign for an improving economy and investment opportunity. “We had been in an environment where the central bank, the Fed in the U.S. had been raising rates. But now with inflation really coming down, the Fed has air cover to lower rates,” Gray said in his market update. “We think this moment in time is when you want to lean in and deploy capital after a downturn, before that proverbial all-clear sign,” Gray said. "But all the signs are pointing to 2024 being a more active year.” Blackstone and others appear to be waiting for the moment to begin to buy. With $65B of dry powder earmarked for real estate investments, Blackstone should be active going forward. Gray isn’t the only one excited about the real estate space. Marathon’s Bruce Richards was on Bloomberg TV this past week discussing the opportunities in distressed commercial real estate. Richards said that investors could see returns in the 15% to low 20% range in distressed commercial real estate space. Richards estimates that 200-300 smaller regional banks, many of whom have exposure to commercial real estate, could fail. Marathon recently raised a $1.7B fund for asset-based lending, which, among other activities, buys assets tied to commercial mortgages. Securities that repackage mortgages, CMBS, are an area of focus for firms like Marathon and other real estate investment firms that have the ability to underwrite well and figure out the appropriate tranche to own from a risk / reward perspective. Real estate, particularly commercial real estate, has been through a rough few years. Some large and active investors appear to think that now is a good time to buy.
📝 Is PE Ready for College Sports? | Dan Weil, Institutional Investor
💡Institutional Investor’s Dan Weil reports increasing interest from private equity in college sports. As college sports increasingly evolves into a business, thanks to advancements with the NIL, investors are looking at a meaningful pool of revenue. Universities in the five big sports conferences generate over $8B in annual revenue, according to private equity firm Arctos Partners. That figure is right below the National Basketball Association and Major League Baseball. The size of this revenue pool is attracting private equity firms to the gates of university campuses. “I expect increasing interest from private capital in college sports, particularly college football,” says Will Mao, Senior Vice President of media rights consulting for Octagon, a sports and entertainment agency. But, investing in college athletics is far from easy. Weil reports that private equity firms have to deal with a number of nuances that could complicate investing into the space. Are student-athletes employees? How do marketing rights work? These are just a few of the questions that private equity firms are facing with college sports. Private equity firms have media / TV rights, one of the most valuable aspects of the sports revenue pool. Two notable deals recently happened in the TV rights space with Learfield and Payfly, two of the biggest negotiators of college sports TV rights packages, taking in private equity capital. Clearlake Capital Group, Charlesbank Capital Partners, and Fortress Investment Group invested in Learfield, and Access Holdings bought a stake in Payfly Sports. TV rights themselves are a big prize. The Big Ten has an $8B, seven-year broadcast agreement with Fox, CBS, and NBC to televise games. It wouldn’t be surprising if private equity firms want to find a way to directly own the revenue streams of broadcast rights. Infrastructure investments could be an easier way for private equity firms to gain exposure to the growing business of college sports. University of Texas at Austin’s recent collaboration with Oak View Group, a sports real estate manager, and Live Nation Entertainment offers one such successful example. Oak View developed (for free) and operates the $380M University of Texas Moody Center in Austin. Live Nation is responsible for bringing the entertainment. Arctos’ Co-Founder Ian Charles, whose firm has invested in several NBS teams, believes that infrastructure investments may be an avenue for alternative asset managers to become involved in sports, provided they offer the right type of return profile. “Successful structured transactions may fund specific growth initiatives like stadium renovation or modernizing local infrastructure, which are backed by contracted revenue streams such as ticketing, sponsorship, and TV rights,” he said. Florida State University went a step further. Sportico reported in January that FSU officials enlisted JPMorgan Chase to explore how the school’s athletic department could raise money from private equity firms, talking with Sixth Street and Arctos about a possible investment. FSU, which is looking to leave the Atlantic Coast Conference (ACC), has explored using private equity capital to finance a $120M exit fee from the ACC. In exchange, private equity firms could own a portion of the sports revenue streams, such as broadcast rights and sponsorships. RedBird Capital Partners (and Liverpool and AC Milan owners) Founder Gerry Cardinale told the New York Times that the University of Michigan football team might be worth $1.5B. But would universities be willing to bring financial-focused investors under the tent? That’s the big question.
💸 AGM’s 2/20: As professional sports become an increasing focus for private equity investors, college sports appear to be next in line. College sports has graduated to a level where the investment opportunities for athletes, universities, and investors are too compelling to ignore. The size and scale of college sports rival those of some of the largest professional sports. With an $8B, seven-year broadcast deal, the Big Ten has revenue from TV rights that aren’t far off from some of the biggest professional leagues in the US. The potential revenue pool from TV rights alone makes college sports an attractive investment opportunity for private equity firms. Add in the fact that the NIL has enabled athletes, including star players like USC football QB Caleb Williams, to make millions of dollars while in school via endorsement deals, and college sports looks like it’s in the early innings of financialization. The Athletic reports that Caleb Williams made around $10M in his final two seasons at USC, thanks to sponsorship deals with Dr. Pepper, Nissan, Wendy’s, and others. NIL deals prove that it’s not just private equity firms that benefit from the business evolution in college sports. The balance of power has shifted from teams and leagues to players, some of whom now hold the cards on and off the field (hear more on this topic from UCLA QB and NIL National Male Athlete of the Year, Chase Griffin, on his AGM podcast). Players have increasing power as a result of this changing landscape, opening up investment opportunities in a number of ways for them and companies that can help them navigate their financial lives. As more money goes into college sports TV rights, more players will have to deal with money earlier on in their careers. Companies like Scout, founded by former college athlete Michael Haddix, educate college athletes on money management and help them manage their newfound wealth while in school. As private equity money flows into sports, it’s worth thinking about the second-order effects that it will have on players and the game. Ample opportunities will arise as a result.
Who is hiring?
In order for alts to continue to go mainstream, we need the best talent to go into the space. Here are some openings at private markets firms. If you’d like to connect with any of these teams, let me know, and I’m happy to facilitate an introduction if appropriate. If you’re a company or fund in private markets, feel free to reach out to share a job description you’d like to be listed here to highlight for the Alt Goes Mainstream community.
🔍 Neuberger Berman Private Wealth (Investment and wealth management platform) - Head of Investment Platform. Click here to learn more (and a chance to work directly with AGM podcast guest, NB Private Wealth CIO Shannon Saccocia).
🔍 Apollo (Alternative asset manager) - Distribution & Wealth Services Associate. Click here to learn more.
🔍 iCapital (Private markets infrastructure investment platform) - Alternative Investment Fund Origination - Vice President / Senior Vice President. Click here to learn more.
🔍 Goldman Sachs (Asset manager) - Asset & Wealth Management - Alternatives Distribution for Wealth - Vice President (London). Click here to learn more.
🔍 Canoe Intelligence (Alternative asset management data) - Senior Product Manager. Click here to learn more.
🔍 LemonEdge (Fund accounting) - AVP Sales. Click here to learn more.
🔍 Hamilton Lane (Alternative asset manager) - Vice President, Private Wealth Solutions. Click here to learn more.
🔍 Isomer Capital (European VC fund of funds) - Investor, Secondaries. Click here to learn more.
The latest on Alt Goes Mainstream
Recent podcast or video episodes and blog posts on Alt Goes Mainstream:
🎙 Hear how Chris Long, Chairman, CEO, and Co-Founder of Palmer Square Capital Management has built a $29B credit investment firm and a winning NWSL soccer franchise, the KC Current. Listen here.
🎙 Hear stories from building market-defining companies Blackstone, Airbnb, and private markets from Laurence Tosi, former CFO of Blackstone and Airbnb and Managing Partner & Founder of $7.6B investment firm WestCap. Listen here.
🎙 Hear Patrick McGowan, MD and Head of Alternative Investments, and Oksana Poznak, Director of Strategic Partnerships of $28B Sanctuary Wealth on working with the wealth channel. Listen here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the seventh episode of our monthly show, the Monthly Alts Pulse. We discuss why chemistry and collaboration key for the next wave of private markets and how solving distribution challenges in private markets means solving logistics problems. Watch here.
🎥 Watch me talk with David Weisburd of 10X Capital Podcast about why the wealth channel is becoming a centerpiece of the LP universe, drawing on my experience helping to build the wealth channel at iCapital as an early, pre-product employee and our investments at Broadhaven Ventures in private markets technology. Watch here.
🎥 Watch the replay of the fireside chat at Future Proof decoding the rise of alts with some of the most influential players in private markets: Stephanie Drescher, Partner, Chief Client & Product Development Officer, and member of the Leadership Team at Apollo, and Shannon Saccocia, the CIO at Neuberger Berman Private Wealth. Watch here.
🎙 Hear Chris Ailman, the CIO of $307B CalSTRS, discuss how he manages a portfolio with ~40% exposure to private markets. Listen here.
🎙 Hear the incredible story of “tech’s most unlikely venture capitalist,” Pejman Nozad, Co-Founder & Founding Managing Partner of Pear VC, on how they’ve built a seed investing powerhouse. Listen here.
🎙 Hear wealth management industry titan Haig Ariyan, CEO of Arax Investment Partners, share his thoughts on the private equity opportunity in wealth management and why the intersection of wealth and alts is one of the biggest trends in private markets. Listen here.
🎙 Hear $40B AUM Cresset Co-Founder & Co-Chairman Avy Stein and Director of Private Capital Jordan Stein live from the Allocate Beyond Summit discuss how private markets are changing wealth management. Listen here.
📝 Read how 73 Strings CEO & Co-Founder Yann Magnan and team are leveraging AI to build a modern and holistic monitoring and valuation platform for private markets in The AGM Q&A. Read here.
🎙 Hear Robert Picard, Head of Alternatives at $117B AUM Hightower, discusses how they approach alternative investments. Listen here.
Thank you for reading. If you like the Alts Weekly, please share it with your friends, colleagues, and anyone interested in private markets.
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If you have any suggestions, would like me to feature an article, research, or would like to recommend a guest or topic for the Alt Goes Mainstream podcast, reach out! I’d love to include it in my next post or on a future podcast.
Special thanks to Michael Rutter and Nick Owens for their contributions to the newsletter.