AGM Alts Weekly | 6.30.24
AGM Alts Weekly | 6.30.24
AGM Alts Weekly #58: Making private markets more public, every week.
👋 Hi, I’m Michael.
Welcome to AGM, the meeting place for private markets.
I’m excited to share 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 private markets so you and your firm can stay up to date on the latest trends and navigate this rapidly changing landscape.
Good afternoon from Washington, DC.
It’s no secret that fundraising has become a challenge for private equity managers over the past two and a half years.
But how difficult has it really been?
Apollo’s Mid-Year Outlook for Private Equity highlights just how hard it’s been. Perhaps nothing sums up this current state of fundraising for fund managers better than this chart from Apollo’s report.
In 2021, almost 20% of private equity funds closed after less than six months in market fundraising. Funds closing in Q1 2024 weren’t so lucky. Around 5% of funds closed were in market for six months or less, and only around 10% of funds successfully raised in less than 12 months. The time to fundraise for the largest group of funds? 19-24 months.
Funds have had no choice but to adjust to a new normal as they have gone out to raise over the past few years. The remainder of this year doesn’t look to be any more promising.
JP Morgan’s Q2 2024 Guide to Alternatives paints the picture of a sober reality. Through May 2024, global private capital fundraising stood at $489B. While this figure has already surpassed that of 2012, it’s unlikely that 2024 will reach the figures of the past seven years. If the remainder of 2024 follows the pace of the first five months, the fundraising figure should end a bit over $1T. That’s nothing to sneeze at, but it’s a far cry from the $1.742T raised in 2021 and the $1.552T raised in 2022.
Private equity and venture capital appear to be bearing the brunt of a more challenging fundraising environment. Private equity fundraising would be lucky to reach the figures from the past five years. Venture capital fundraising would be even more lucky to do so.
The question on private equity fund’s minds: Where will the capital come from?
Apollo’s report provides some foreshadowing. Capital likely won’t be flowing from institutional investors. Pensions expect a marked decline in target private equity allocations. Sovereign wealth funds also foresee a reduction in their private equity investments. Foundations, endowments, and wealth managers are many fund’s only hope to fill the hole left by other institutional allocators. But will it be enough?
A challenging fundraising environment should be the new normal for many funds. The game on the field has changed. So, too, will many funds’ tactics.
A playbook for ways to win the game on the field
Drop it in the bucket
Allocators like when there is a clear and defined bucket for a fund based on their strategy. It makes for an easier decision when they are looking to trim an exposure in a specific part of their portfolio or when they are trying to reach a certain allocation target for a particular strategy.
Yes, views on liquidity are changing. That might make it easier for allocators to think about putting private markets strategies in an equities or fixed income bucket that spans the spectrum of liquidity and illiquidity rather than having a separate alternatives allocation.
Emerging strategies in private markets might face more of a challenge than the more standard private equity, private credit, or real estate strategies. Where does a strategy like GP stakes, which has characteristics of private credit, private equity, and secondaries wrapped into a single strategy, fit in? Does an allocator put it in the private credit bucket because of the strategy’s current cash yield? Does the allocator chalk it up as another private equity strategy because it’s more exposure to private equity funds and benefits from the upside in private equity fund performance?
A category like sports investing could face similar challenges. There are a number of different ways that funds are approaching the sports space. Some funds are focusing on equity stakes in teams. Other funds are focusing on credit strategies. Some are blending both equity and credit strategies. Some are focused on blue-chip teams and leagues. Others are focused on emerging teams and leagues. Where will investors bucket sports investments? Will they label it an equity investment or a credit investment based on the fund’s strategy? Will they reserve sports investments for a more opportunistic bucket?
Funds, particularly those in emerging categories, will have to find ways to create frameworks that help allocators figure out where to fit their strategy into a portfolio. This is especially true for funds that are newer entrants to private markets. This task will require a lot of education on the merits of a particular strategy even before the specific fund’s unique advantages are discussed. Funds will have to play the long game if they want to win.
Play the long game
LP allocation decisions are enterprise sales. They are generally long sales cycles and sometimes take years to consummate. It might take an LP watching the performance of multiple fund vintages before making an allocation decision. But that allocation decision is likely a long-term relationship that will span decades and involve multiple funds.
To manage long sales cycles, funds must play the long game. They should invest in education and content — and not just when they are out raising their fund. With many funds in market for 18-24 months, anything that can shorten the sales cycle by months becomes extremely valuable. Staying top of mind and providing educational value to LPs can be worth the time and effort creating high-quality informative content.
More than ever, funds need to build their brand to differentiate. As the wealth channel becomes an increasingly prominent LP in private markets, building brand is not optional. It’s required.
The biggest alternative investment managers have invested heavily in brand, doing everything from establishing alternatives universities (Blackstone) and academies (Apollo), to ramping up their LinkedIn marketing efforts to humanize what they do and how they do it, to creating holiday videos based on Taylor Swift’s Eras tour and TV commercials.
To win in the wealth channel, building brand is critical. The industry is still so early in the adoption of private markets by the wealth channel. Firms that can effectively build their brand with wealth advisors and end clients will reap tremendous benefits in the long term.
Smaller funds might lack the marketing and sales resources of their larger counterparts, but that doesn’t mean they can’t play the content game. Whether it’s building out a social media strategy on LinkedIn or creating research reports or industry deep dives, developing and executing on a content strategy should be as core to the fund’s strategy as anything else.
Educational content is the key to success in building a brand. LPs want to understand more about a specific category or strategy. Educate them. Become a trusted resource. Provide timely and relevant insights. Decode the nuances of a strategy or sector. Doing this, especially off-cycle from when a fund is in market, will create a level of trust with LPs and brand exposure that will make the sales process easier when the next fund is back in market.
Creating and producing content is a long game in and of itself. But consistency and building a brand that illustrates expertise around a specific topic will take a fund from the J-curve of time and resources spent on marketing and content creation to the harvest period of yielding successful sales conversion of LPs into new funds quicker as more time goes on.
Find the platform
In the wealth channel, platforms are paramount. It’s no surprise that the largest alternative asset managers are focusing much of their sales efforts on the wirehouse and independent wealth platforms. The structure and process for evaluating and onboarding alternatives managers to their platforms might take time, but they are worth the effort because of the size and scale they can offer to funds.
Wirehouse menus have been the biggest battlegrounds to date. A coveted spot on a wirehouse alternatives menu isn’t easy to achieve, but it can be incredibly valuable. It’s no surprise that the largest alternatives managers have spent significant time and effort trying to work with the wirehouses. They are — and I believe will continue to be — a large portion of flows from the wealth channel into alts.
But the industry is still so early in its adoption of private markets. That includes the wirehouses. iCapital CEO and Chairman Lawrence Calcano has said in the past that “20% of the advisors at a wirehouse represent 80% of that wirehouse’s flows into alternatives.” He might be speaking more generally than with an exacting precision on numbers, using a reference to the 80/20 rule, but his point should be well-taken. Speaking to a number of people at wirehouses and at alternative asset managers, they echo the sentiment that it’s a small number of advisors that are currently allocating the lion’s share of a wirehouses’ flows into alternatives. How wirehouses are structured is a critical component to why funds have successful distribution through this channel. News of UBS, which has over $250B in assets in alternatives, revamping its structure to create the Unified Global Alternatives business should be even more effective for distribution of alternatives funds. Just continuing to cover the wirehouses well could lead to meaningful flows into private markets that move the needle for funds — and the industry at large.
The largest firms are well-equipped to compete on this battleground. There is an element of boots on the ground that is required to win this channel, particularly as more advisor teams begin to adopt private markets investing. The biggest alternatives managers have made this strategic decision and are going after it with full force. Meaningful capital, time, resources, and education are required. But the largest firms have proven that they are ready to take on the challenge.
Alternatives managers who have recently entered the wealth channel have a strategic decision to make. Do they try to compete for slots on wirehouse menus, or do they shift their focus to smaller banks and independent wealth platforms?
It will be hard for a smaller manager to compete with the firms that have been investing in building their wealth distribution and operations teams for years. Firms like Blackstone, Apollo, KKR, Blue Owl, Carlyle, and others have hundreds of people in their private wealth businesses. Competing with these firms from both a headcount and hard dollar investment perspective will be a challenge, particularly as they are operating from behind.
I expect other firms to turn their attention to independent wealth platforms as they look to gain a foothold in the wealth channel. But that won’t be without its challenges either. The largest firms recognize that the independent channel is growing fast and that many of these large independent platforms could be at a size and scale that’s meaningful to their business in the same way that wirehouses are, albeit with a different sales cycle and sales motion. Independent platforms are the next big area of focus for alternatives managers looking to work with the wealth channel — and that focus should only intensify.
Scale matters
Being a one-stop shop will make it easier for larger firms to work with the wealth channel. Scale matters — in terms of brand reach, investment in education and sales headcount, and product breadth and depth. Many investors, especially those newer to the space, will want to make fewer decisions, not more. A fund that has a recognizable brand that the wealth channel trusts will likely be able to successfully raise from this investor cohort and, crucially, cross-sell other products. A data point from Ares’ April earnings call offers a concrete example of the importance of being a multi-product platform.
From AGM Weekly 4.7.24: What is perhaps even more impressive is how much they grew their relationships with existing investors across the Ares platform. The data reflects that Ares has figured out how to penetrate more wallet share of existing investors: in 2018, over half of direct institutional AUM was only invested in one investment product with Ares. Now, more than two-thirds of AUM is with investors who invest in at least two or more investment groups.
Two-thirds of Ares’ $419B AUM (from April 2024) comes from investors who invest in at least two or more investment groups. This data point highlights how important it is to build a trusted brand — and how accretive that can be for building an alternative asset manager.
Fee-ling a change
The balance of power has shifted back to LPs from GPs. LPs hold the cards. GPs have to make concessions if they want LPs to open up the checkbook.
PEI’s Hannah Zhang recently highlighted a Paul, Weiss study earlier this year that found 38% of GPs offered discounts on management fees for LPs that committed into earlier closes. This figure was up 18% from the prior year.
Much of the industry is no longer at a 2/20 fee structure, so downward pressure on fees is nothing to sneeze at. What it does mean is that LPs can drive terms in a fundraising environment like the current one. It also means that GPs will look to replace lower fees with greater scale. But can they achieve desired scale in an increasingly challenged fundraising environment? The largest firms will probably be ok. As a Blue Owl report highlighted recently, the trend is that the largest firms raise the lion’s share of capital in a given strategy. Scale favors those with scale.
GPs will have no choice but to cede on fees in exchange for scale. There might be reluctance and pain for some in the short-term, but the longer-term growth of the industry should provide enough of a carrot to get it done. It’s possible that private markets could double from $15T to $30T in the next seven years after tripling from $5T to $15T over the past seven years. Trillions will come from the wealth channel, which will move the needle on AUM growth.
Liquid courage
When coming back into the market for a new raise, funds need to think about their DPI on prior funds. LPs want to see that a fund has the ability to generate liquidity and distributions. This data point seems to be even more important in the wealth channel.
Liquid courage from GPs is important. To a point. There’s a balance between generating DPI for the sake of showing distributions in advance of a new fundraise and holding onto an asset for a longer duration because they believe in the compounding effects from additional upside. I’ve seen funds prematurely sell assets to generate DPI for a fundraise when they would have been better off holding the investment. I understand the intent from a fundraising perspective, but while an LP will generally not complain about DPI, I’m sure, in hindsight, the LP (and GP) would have rather held onto the asset and traded the liquidity for enhanced returns.
Luckily, the secondary market is in the midst of a number of innovations that are providing funds and LPs with avenues to balance both liquidity and asset appreciation.
Continuation vehicles provide one such avenue for liquidity. A 2023 Barings report highlighted the growth in the CV market, which is only in its early stages of development.
A recent podcast episode on Ted Seides’ Capital Allocators show with Dawson Partners Managing Partner Yann Robard highlighted the coming evolution in the secondaries market. Robard stated that he believes the secondaries market will grow to $1T annually by 2030. What will it take for this to occur? He makes the astute point that the next ten years in the secondaries market will not look like the past ten. Robard said that it will become much more commonplace for investors to complete secondary transactions because LPs will hold GPs feet to the fire, asking the question “if you haven’t done a secondary, is that the right thing to do?” As more capital flows into private markets, particularly in strategies that are still in the capital accumulation phase, like private credit, real estate, and infrastructure, as Robard points out, secondary transactions and continuation vehicles will become part of the toolkit to achieve liquidity.
Create your own distribution luck
In a more challenging game, tactical adjustments are critical to creating the small advantages that are the difference between winning and losing.
GPs will look to manufacture ways to raise capital. One way to do so is to create captive distribution channels. GPs have done this in a number of different ways. Apollo’s acquisition of Athene is one such example of creating a captive distribution channel. Other alternative asset managers have followed suit with purchases or strategic investments into life insurers.
Another way to create a structural distribution advantage is to develop a strategic partnership with an asset manager. Tikehau did just that. This week’s news of their partnership with Nikko Asset Management provides an example of how an alternative asset manager can enhance their distribution capabilities. Nikko, a $220B AUM Japanese asset manager, made a strategic investment into Tikehau in exchange for an equity stake in the growing alternative asset manager. In exchange for the equity stake, Tikehau will have access to Nikko’s distribution capabilities. Nikko will have exclusive distribution rights in Japan and non-exclusive distribution rights in other Asian markets where investors are looking to allocate to private markets.
I expect that we’ll see more strategic partnerships between asset managers that can offer distribution capabilities in new markets or greenfield channels, as Nikko and Tikehau have done.
GP stakes investments can also be a piece of the distribution advantage puzzle. GP stakes firms, like Blue Owl, replete with large platform teams that help funds sell into wirehouse platforms and institutional LPs, can also be another way for GPs to enhance their fundraising firepower. At Cantilever, our partnership with BTG Pactual, which has its own wealth management unit, offers an opportunity for partner GPs to gain access to a captive wealth channel. I anticipate banks and asset management firms will look to leverage their ability to unlock distribution channels for GPs as a way to form strategic partnerships with alternative asset managers.
The cutting edge
“What is your edge?”
The most important question an LP can ask, yet, at times, the hardest for an LP to discern the difference.
How can a GP effectively answer this question from LPs? They can distill the meaning of edge by reframing the question: “What are we selling?”
To sell to LPs, GPs need to break down what they are selling to LPs. Are they selling a brand? Are they selling scale? Are they selling data and technology as a sourcing, evaluating, and investing advantage? Are they selling unique insights or experiences in a market?
Answering these questions effectively will go a long way toward cutting through the competition to achieve fundraising success.
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
Quick takes from Bloomberg Invest
📝 Bloomberg held its conference, Bloomberg Invest, this week in NYC. A number of industry leaders discussed private markets and shared their views on opportunities and challenges ahead for the industry.
I thought I’d highlight some quotable and notable comments and share my quick takes on them.
💸 AGM’s 2/20: Nuveen CIO Saira Malik affirms a trend that’s been occurring in asset allocation amongst institutions and individual investors. The 60/40 portfolio is no longer — and alternatives are becoming a larger portion of investors’ portfolios. While some institutional investors are at 20% or greater in their exposure to alternatives, much of the wealth channel (with the exception being larger family offices) is far off from Malik’s 20% allocation target. If the wealth channel comes closer to the 20% allocation target to private markets, that’s trillions — if not tens of trillions — of additional AUM flowing into private markets. Ares’ Mike Arougheti made an astute point in a recent interview on CNBC at the Ares Investor Day: he said that what could “tamp growth in this industry is [whether or not] there are enough quality assets that we can all originate and structure to deliver outcomes to the investor?” Arougheti hits on the key question that both GPs and LPs will have going forward: can the number of investable opportunities match the amount of capital flowing into private markets so that there’s still an adequate return generation opportunity relative to the risk investors are taking by investing in private markets and exposing themselves to the illiquidity that comes with it?
💸 AGM’s 2/20: Eldridge’s Todd Boehly stated his belief in private credit as an asset class, which would indicate that he believes there are enough quality opportunities in the strategy to continue to generate returns for investors even as more capital flows into the space. Skeptics of the asset growth in private credit point to the potential risks it creates for the system. Boehly seems to think that there’s plenty of room to run in private credit, effectively betting the future of his firm on the space.
💸 AGM’s 2/20: Apollo’s John Zito touches on a category of increasing activity within private credit: risk transfer deals between banks and private credit firms to insure against the risk of assets on its balance sheet. This move is in response to regulatory constraints faced by banks. Private credit firms have the opportunity to fill a gap in the market by providing banks with the ability to offload some of the assets on their balance sheet (at a cost).
Pemberton shared research in a 2023 report that finds the RST (risk-sharing transaction, or SRT, significant risk transfer) industry has had an 18% growth rate since 2010. Pemberton expects a 2.5-3x increase in the volume of SRT tranches from the current level of $54B to $130-150B by 2030. Pemberton finds that in order to achieve $130-150B in volume by 2030, the supply of SRT tranches would only have to increase by 6.5-8.5%, markedly below the 18% growth rate the industry has experienced.
A number of alternative asset managers have looked to move into this market to capture the secular nature of this regulatory trend. Apollo, somewhat of a bellwether in private credit, has not.
💸 AGM’s 2/20: QIA Al-Sowaidi’s comments further the notion that institutional investors and alternative asset managers see banks as being in a tough position, in large part due to regulatory constraints. This feature of the market puts private credit firms in a prime position to capture market share and increase the scope of their activities in credit to fill the void left by banks. The fact that large allocators like QIA see private credit as an opportunity means that private credit firms should have room to run with fundraising. Blackstone’s CIO of Credit and Insurance Michael Zawadzki echoed this sentiment in an interview this week with Bloomberg’s Sonali Basak. Zawadzki believes “we’re still in batting practice when you think about the opportunity set ahead.” He went on to share that he believes the market size for private credit could balloon to $25T, up from the $1.7T that it sits at today. This number would fall short of Apollo’s estimation of the total addressable market being at $40T, with the vast majority of it being non-traded, investment-grade credit found on balance sheets of banks and large investors. Bruce Richards, CEO at $23B AUM Marathon Asset Management, predicted earlier this week that private credit could reach $15T. He cited asset-backed lending as becoming a larger part of the private credit universe, saying that the subsector could grow as much as 40% per year to become a $6T market.
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.
🔍 Blackstone (Alternative asset manager) - Private Wealth Solutions - Educational Content Strategist, Vice President. Click here to learn more.
🔍 Apollo (Alternative asset manager) - Distribution & Wealth Services Associate. Click here to learn more.
🔍 iCapital (Private markets infrastructure investment platform) - RIA Business Development - Vice President / Senior Vice President. Click here to learn more.
🔍 73 Strings (Portfolio monitoring and valuation) - Implementation Specialist. Click here to learn more.
🔍 Ultimus (Fund administrator) - Vice President - Fund Accounting. Click here to learn more.
🔍 Blue Owl (Alternative asset manager) - VP / Principal, Private Wealth Market Leader. Click here to learn more.
🔍 Hamilton Lane (Alternative asset manager) - Vice President, Private Wealth Content Strategist. Click here to learn more.
🔍 LemonEdge (Fund accounting) - Implementation Manager. Click here to learn more.
The latest on Alt Goes Mainstream
Recent podcast or video episodes and blog posts on Alt Goes Mainstream:
🎙 Hear New Edge’s CEO, Managing Partner, and Co-Founder Rob Sechan and CIO Cameron Dawson discuss growing a cutting edge $44B platform to serve the wealth channel and help them navigate private markets. Listen here.
🎥 Watch live interviews with European alts leaders on 2024 European private market trends with Spencer Lake, Partner, 13books Capital, Toby Bailey, VP of Sales EMEA, Canoe, Rezso Szabo, General Partner, Illuminate Financial, Dan Kramer, Strategic Advisor, ex-CEO, Jaid AI, Tom Davies, Managing Director and President, Forge Europe, Levent Altunel, Co-Founder, bunch, Jay Wilson, Partner, AlbionVC. Watch here.
🎙 Hear Ritholtz Wealth Management’s Managing Partner Michael Batnick share views on how wealth managers are navigating private markets. Listen here.
🎙 Hear HgT’s Chairman of the Board Jim Strang provide us with a masterclass in private markets. Listen here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I welcome special guest Robert Picard, Managing Director, Head of Alternative Investments at Hightower Advisors, as we take the pulse of private markets on the 10th episode of our monthly show, the Monthly Alts Pulse. We discuss the operational challenges and solutions in private markets. Watch here.
📝 Read about the evolution of GP stakes, why alternative asset management business models are better than SaaS, and our partnership with Todd Owens and David Ballard at Cantilever, a mid-market GP stakes firm anchored by BTG Pactual. Read here.
🎙 Hear 3i Members Co-Founder Mark Gerson share how to build engaged investing communities. Listen here.
🎙 Hear Yieldstreet Founder & CEO Michael Weisz discuss how to deliver private markets investment opportunities directly to consumers. Listen here.
🎥 Watch internet pioneer Steve Case, Chairman & CEO of Revolution and Co-Founder of America Online, share lessons learned from building the first internet company to go public and an investment firm built for the Third Wave of the internet. Watch & listen here.
🎙 Hear Carlyle Operating Partner & Net Health CEO Ron Books discuss lessons learned from growing ECi Software Solutions to $500M revenue and $200M EBITDA and working with private equity. Listen here.
🎙 Hear Blue Owl’s Global Private Wealth President & CEO Sean Connor share insights and lessons learned from working with the wealth channel. Listen here.
🎙 Hear Blackstone CTO John Stecher discuss how technology is transforming private markets. Listen here.
🎙 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.
🎥 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 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.
📝 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.