AGM Alts Weekly | 9.24.23
AGM Alts Weekly #20: Making private markets more public, every week.
š Hi, Iām Michael and 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 whatās 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 LA. Today is about connecting the dots. Consolidation is the theme of the day, and perhaps the past few years, in both private equity and wealth management.
This weekās articles highlight just how prevalent consolidation is in private markets. It seems like almost weekly we are seeing yet another wealth management platform consolidate another wealth management firm or receive a sizable investment from a private equity fund. That happened this week with Carlyle investing into Captrust.
While private equity sees an investable opportunity in the wealth management space because of the attractiveness of consolidating firms into larger platforms, private equity itself appears to be undergoing consolidation. CVCās recent acquisition of ā¬16B AUM infrastructure fund DIF Capital Partners for ā¬1.1B is yet another example of private equity firms continuing their march to transforming into multi-strategy, diversified platforms. This sentiment was echoed by Partners Group CEO David Layton, who said this week that he believes the industry could see massive consolidation from the current number of 11,000 private equity firms to as few as 100 next-generation platforms over the next decade. Bigger may in fact be better in a few respects. In certain corners of private markets, size does matter. And a new regulatory landscape favors larger platforms over smaller managers, who have less capacity and money to deal with the increased regulatory burdens.
Consolidation isnāt just limited to private equity firms. Ares, who appears in two articles highlighted in this weekās newsletter, has branched out into sports, raising a $3.7B fund in 2022 to invest into sports and entertainment properties, such as Inter Miami FC, and most recently, making a $500M investment into Chelsea FC.
Sports itself is undergoing its own moment of consolidation, with the multi-club ownership (MCO) model taking hold, with the likes of City Football Group (Manchester City, NYCFC, Melbourne FC, and 10 others), Red Bull, New City Capital and Pacific Media Group, and RedBird Capital Partners (owners of AC Milan and Toulouse) amongst investors and ownership groups leading the way in terms of MCO.
Ares is a poster child for a firm that has both benefited from consolidation (in the banking sector) to build an incredible private credit franchise and become a consolidator of sorts itself by building out a platform with a multitude of private markets investment strategies as a leading alternative asset manager.
If much of private markets is in the midst of consolidation, whatās next to be consolidated? Venture capital itself is becoming increasingly like private equity at the upper end / large AUM platforms, with firms becoming large, multi-strategy or multi-stage outfits. But when will we see a VC fund get acquired by a larger private equity platform to add to their mix of private markets strategies? Iām betting it wonāt be long.
Then, whatās next after that? A wealth management firm being acquired by a private equity platform? Given the wave of consolidation washing over private markets, none of this would come as a surprise as bigger seems to be better, in many respects.
AGM Index
AGM has created an Index to track the leading publicly traded alternative asset managers.
Some of the industryās largest alternative asset managers are publicly traded ā 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.
AGM News of the Week
Articles we are reading
š CVC Gears Up For Potential November IPO - Source | Anousha Sakoui, Reuters
š”Fresh off of taking a majority stake in ā¬16B AUM infrastructure fund DIF Capital Partners for ā¬1.1B earlier this month, CVC Capital Partners, Europeās largest private equity firm, is working towards a November IPO in Amsterdam, per sources. ā¬140B AUM CVC Capital Partners has gone from strength to strength in fundraising, raising the largest buyout fund in history earlier this year at ā¬26B. Spun out of Citi in 1993, CVC has grown beyond its buyout roots to expand into credit, growth equity, and secondaries. Theyāve also carved out a niche in sports, investing in the likes of Spanish soccer league La Liga, Formula 1, Six Nations rugby, and womenās professional tennis organization WTA. If CVC is to go public, itās possible that they could command a high valuation. They sold a minority stake to Blue Owlās Dyal Group in 2021 at a ā¬15B valuation ā and have since grown the AUM across their different investment strategies. Adding an infrastructure fund at a time where the strategy is popular amongst investors should be favorable in the eyes of investors. Infrastructure, which is often uncorrelated to other asset classes, saw AUM increase at almost 18% annually from 2012-2022, according to Preqin data.
AGMās 2/20: CVCās successful fundraise and expansion into infrastructure signals that they may be the next alternative asset manager to pursue a public listing. Diversified asset managers have tended to perform well in public markets as many of them have seen AUM increase as alternatives continue to grow in popularity. Per the AGM Index, market caps for many of the publicly traded alternative asset managers have increased over 15% as theyāve all seen increases in asset inflows. CVCās public listing would represent the continued institutionalization and transformation of alternative asset managers into diversified investment companies. Their recent majority stake in DIF signals that they understand the value and importance of having a diversified set of investment strategies, which means a diversified set of revenues that can be managed through different market environments.
š Chelsea FC Raises $500M From Ares | Arash Massoudi, Will Louch and Samuel Agini, Financial Times
š”Ares continues its push into the football world, investing $500M into Chelsea FC, the iconic brand but currently struggling Premier League outfit. Ares, who recently invested into Inter Miami, the MLS club now home to star Leo Messi, structured a preferred equity deal to back a storied club in European football. Chelsea, which recently changed hands as private equity firm Clearlake Capital and US financier Todd Boehly took over the reigns last year, is seeking to boost revenue after shelling out the cash during the transfer window. The team has spent hundreds of millions of pounds on players under Boehly and Clearlake, who acquired the club for Ā£2.5B ($3.1B) in May 2022. The club has seen its fair share of struggles on the pitch, but investors believe that the business can be run better and ultimately create more value. Clearlakeās Co-Founder Jose Feliciano remarked at the IPEM private equity conference in Paris this week that they āare trying to reduce salary and essentially the [operating expenses] of the business by over $100M per year.ā Chelsea represents a growing portfolio of sports teams for both Ares and Clearlake / Boehly. Both investor groups have pursued a multi-club ownership strategy, with Clearlake and Boehly acquiring French club RC Strasbourg in June. Ares has accumulated a number of football assets, including Atletico de Madrid and Olympique Lyonnais, after they raised over $3.7B to invest both equity and debt into sports teams, leagues, and media and entertainment companies.
AGMās 2/20: Sports continues to be a top draft pick amongst private equity firms, in large part because sports is, from a business perspective, an entertainment asset. The market around sports has continued to grow, as both technology innovation and leagues and teams creating games within the game (i.e. sports betting, sports card investing, etc) has enabled sports teams to monetize all of the times outside of the games being played on the field or the court. Given the global reach of sports, particularly with the brands that transcend beyond their locality, top sporting assets will continue to command interest from investors. Chelsea is case in point. In recent years, an outfit that has generally been a perennial top finisher in the Premier League and a Champions League qualifier has struggled mightily despite a massive wage bill to acquire talented players. Despite their struggles on the pitch, Chelsea has no issues attracting capital from some of the biggest names in private equity. Following Clearlake and Boehlyās investment last year, Ares, who has stakes in a number of other sports franchises, has decided to invest into Chelsea. This is in large part due to their global reach, international fanbase, and entertainment value. Notably, they also believe that operational improvements can bolster the value of the business. This vein of thinking bleeds into a bigger trend in sports: multi-club ownership (MCO). The MCO model is one that we are seeing become increasingly popular amongst both wealthy individuals or entertainment groups who have been owners in the past (Anschutz Entertainment Group, who owns the MLSās LA Galaxy, the NHLās LA Kings, Canadaās Ontario Reign, a minority stake in Swedish soccer club Hammarby IF, amongst others, and Red Bull, which owns a number of sports assets across soccer and racing, come to mind as two such examples) and amongst private equity firms. Ares is not the first fund to take stakes or make equity or debt investments in a number of different clubs across sports and leagues globally. And they certainly wonāt be the last. The MCO model has a number of benefits. There are synergies to be crystallized due to learnings across clubs, in football, a reduction in transfer fees and agent fees if clubs can transfer players from club to club, professionalization of business models and operational staff, and shared services across clubs on both the business and sports sides. As private equity has successfully executed on rollup models and platform company investments in the past, I see no reason why this canāt be successful over the long-term in sports.
š Carlyle to Take Minority Stake in $832B Captrust | Ian Wenik, Citywire
š”Private equityās foray into the RIA space continues. The Carlyle Group has agreed to take a minority stake in Captrust in a deal that values the $832B RIA at roughly $3.7B. Carlyle will join fellow private equity firm GTCR as a minority investor in Captrust. Captrust said that neither its management team nor GTCR sold secondary shares to Carlyle through the deal. āCaptrust is one of the premier brands within the RIA industry, with a deep bench of expertise and resources that support a premium and ever-expanding service model,ā said Carlyle financial services head Jim Burr. āThe firm has the unique position of leveraging its size and scale to benefit not only clients, but also to benefit the communities it serves. This differentiated position, coupled with Captrustās vibrant culture and strong leadership, makes us incredibly excited to collaborate with our new partners.ā Captrust, which was founded in 1997, is majority-owned by its employees. CEO Fielding Miller will remain the companyās largest individual shareholder. Captrust said it plans to use the new capital to pursue āstrategic inorganic growth opportunities.ā The Raleigh-based firm has become one of the nationās largest RIAs through M&A and a business model that prioritizes both 401(k) plan advice and traditional wealth management. As of the end of June, it had $143B in discretionary AUM and $688B in retirement and pension plan assets. GTCR purchased a 25% stake in Captrust in June of 2020, which valued Captrust at $1.25B. Carlyleās investment into Captrust provides the private equity outfit with its long-awaited direct exposure to the RIA space. Citywire reported in 2022 that Carlyle made an unsuccessful bid for RIA Cerity Partners. Genstar ultimately agreed to buy a majority stake into Cerity, which has become one of the larger firms in the space.
AGMās 2/20: Another week, another big private equity deal in the RIA space. Itās no surprise why wealth management and RIAs are the apple in private equityās eye. The space is growing, the business offers sticky and steady revenue streams, and thereās the potential for consolidation via platform plays. Itās notable that Carlyle is getting into the RIA ownership game directly given their long-standing interest in the wealth channel. They were early movers in trying to bring private equity to the wealth channel, first with their partnership with Central Park Group to create investment products for the wealth channel and then investing in iCapital. In addition to investing into one of the most prestigious and largest RIAs in the space, could this be foreshadowing that Carlyle has more innovation up their sleeves when it comes to the intersection of wealth and alts?
š Private Equity M&A Set to Whittle Sector Down to 100 āNext-Generationā Firms | Chris Flood & Will Louch, Financial Times
š”A leading European private equity firm believes that the number of private market fund managers will shrink to as few as 100 over the next decade, as the combination of higher interest rates, fundraising challenges and increased regulatory costs drive a massive wave of consolidation. David Layton, CEO of Partners Group, said private markets had entered a ānew phase of maturation and consolidation.ā Managers responding to fundraising pressures in more difficult economic conditions and shifting towards wealthy individuals as a driver of new asset growth would lead to a significant rise in M&A activity, he said in an interview. āIt is really only the large players that can withstand the forces reshaping the private markets industry. We could see the current 11,000 or so industry participants shrink to as few as 100 next-generation platforms that matter over the next decade,ā Layton said. Assets held in illiquid private market strategies were up to $12T at the end of December, according to Preqin. The firm estimated that total private markets fundraising dropped 8.5% last year to $1.5T, with net inflows to private equity managers down 7.9% to $677B. Many smaller PE managers have found the process of attracting new business increasingly difficult: the top 25 largest firms have captured more than a third of the $506B of new capital allocated to PE so far in 2023. āThere is a real bifurcation between the managers that can raise money and those that cannot. This will accelerate the process of natural selection as the industry grows in size,ā said Layton. Industry executives have been predicting a shifting landscape in alts for some time. Consolidation is already happening with deals such as CVCās acquisition of a majority stake in Dutch infrastructure investor DIF Capital Partners for around ā¬1B ($1.1B). Bridgepoint announced this month that it was buying Energy Capital Partners, a US-based renewables specialist, in a Ā£835 ($1B) cash and stock deal. Jon Moulton, founder of UK-based Better Capital, believes consolidation will arise as a result of continued fundraising difficulties for smaller PE funds. āInstitutional investors would much prefer to make a single $1B allocation to a large PE manager than write a stream of $100M tickets,ā he said. Additionally, PE managers are facing the prospect of increased legal and compliance costs due to new US reporting requirements, which will be a heavy burden for smaller firms. Historically, private equity consolidation has been a ānon-starter,ā according to Hugh MacArthur, Global Chair of Bain & Coās private equity practice. MacArthur cites integration problems involving culture clashes, executive pay, and performance fees. However, the desire to grow assets may usurp these concerns. Now, many firms see acquisitions as a means of growing assets and strategies to attract more assets from a wider group of investors going forward. Many private equity firms have their eyes on the prize: Partners Group expects AUM in private markets will reach $30T in the not too distant future. The industry may be facing headwinds right now, but continued growth in private markets makes this a prize worth fighting for.
AGMās 2/20: Private equity funds have long been investing into industries where thereās consolidation ā and now private equity itself appears to be ripe for consolidation. We must remember that private equity is a relatively new industry. Blackstone, which hit the $1T AUM mark and joined the S&P 500, is but 38 years old. Even other household names in private equity, such as Warburg Pincus, arenāt even close to a century old (they were founded in 1966). Itās not surprising that the industry itself is undergoing an evolution on a number of dimensions ā acquisitions, the largest players becoming platforms, publicly traded firms, developing talent directly out of school, competing with banks on the lending / credit sides. But to think that the industry will shrink to only 100 platforms in the next decade is quite a statement. There are a few things worth noting as we unpack this statement. I agree with Laytonās observation that we are seeing a rise in the number of private equity platforms. This evolution should continue for a few reasons. One, multi-strategy platforms are easier for many institutional allocators to work with and deploy capital into, as thereās been a secular trend for institutional investors to shrink the number of fund manager relationships over recent years. Two, multi-strategy platforms provide the opportunity for better valuation multiples for private equity firms. Different investment strategies perform better in different market cycles, both from fundraising and performance perspectives, thus driving fee-related earnings attached to fundraising efforts. Yes, from a business perspective it makes sense for private equity firms to get bigger (grow AUM) and get better (expand strategies or geographically). But what about returns? It will be interesting to see how the question of returns play out as more capital flows into private markets. Certain strategies, such as private credit or private equity real estate, may not be negatively impacted from a returns perspective even if fund sizes grow. But data shows that in certain strategies, such as venture, smaller (sub-$250M funds) specialist funds outperform. Preqin data analyzing 1,824 VC funds from 2000-2020 shows that from 2010-2020 specialist funds under $250M AUM markedly outperformed their generalist fund peers (1.9x TVPI to 1.3x from 2010-2015 and 1.7x to 1.4x from 2015-2020). So, how should LPs think about investing into smaller funds, particularly in areas of private markets like venture and lower middle market private equity? Perhaps some of these funds will be acquired by larger multi-strategy platforms, where they can maintain smaller fund sizes but leverage the benefits of a broader platform. But, this is quite a big question for the future of private markets because, after all, returns are the engine that drive success.
Videos we are watching
š Ares Management CEO Mike Arougheti expects the private credit market to double to $3 trillion within 5 years | Bloomberg Markets, Global Private Credit Forum
š”$378B AUM Ares Management CEO Mike Arougheti discusses how the private credit market goes from $1.5T AUM to $3T AUM over the next five years. Outlining many of the structural changes that paved the way for recent growth in private credit, Arougheti shares a number of interesting points. How did we get to the first $1.5T? A wave of bank consolidation, particularly in the US, overarching regulation from the GFC and Basel framework, and consolidation in public equity markets have all played a role in opening up the floodgates for private credit. Arougheti believes that financing just the existing equity in the market could get private credit to $3T AUM within the next five years, but he believes there are further structural changes ahead. Arougheti believes that the US is still massively overbanked. Despite going from 8,000 FDIC-insured banks to 4,000 FDIC-insured banks, the US still has far more banks than the next largest developed economy, who Arougheti estimates has 100 banks. He believes that we are headed for further consolidation in the banking sector in the US, which should open the door for private credit to continue to fill the white space opened by retrenchment and consolidation of the banking sector.
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 youād like to connect with any of these teams, let me know and Iām happy to facilitate an introduction if appropriate. If youāre a company or fund in private markets, feel free to reach out to share a job description youād like to be listed here to highlight for the Alt Goes Mainstream community.
š bunch (Private markets infrastructure investment platform & SPV infrastructure) - Head of Commercial. Click here to learn more.
š iCapital (Private markets infrastructure investment platform) - Midwest, Regional Director, Senior Vice President. Click here to learn more.
š Allocate (VC infrastructure investment platform) - Managing Director, Alternatives (Sales). Click here to learn more.
š Republic (Multi-strategy alternative investment platform) - Chief Technology Officer. Click here to learn more.
š Isomer Capital (European VC fund of funds) - Investor, Secondaries. Click here to learn more.
The latest on Alt Goes Mainstream
Recent episodes and blog posts on Alt Goes Mainstream:
š Hear the incredible story of ātechās most unlikely venture capitalist,ā Pejman Nozad, Co-Founder & Founding Managing Partner of Pear VC, on how theyāve built a seed investing powerhouse. Listen here.
š Hear sustainable investments pioneer Bill Orum, Partner of $9B AUM OCIO Capricorn Investment Group, discuss how Capricorn has proven that doing well and doing good donāt have to be mutually exclusive. Listen here.
š 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.
š„ Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the third episode of our monthly show, the Monthly Alts Pulse. Watch here.
š Hear investing legends John Burbank and Ken Wallace of Nimble Partners provide a masterclass on investing with a macro lens from Johnās background as a leading macro hedge fund manager at Passport Capital and on micro VC from Kenās background backing some of the top emerging VCs at Industry Ventures. Listen here.
š 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.
š Hear Alto CEO Eric Satz discuss how anyone can invest in alternatives through their IRA. Listen here.
š 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.
š Hear $18B AUM Savant Wealthās award-winning CIO Phil Huber talk about how LPs can build a strategy for investing in private markets. Listen here.
š Hear Avlok Kohli, AngelListās CEO, talk about how they are building the company of companies that is powering private markets. Listen here.
š Hear Seyonne Kang, Partner and member of the private equity team at $134B AUM StepStone, discuss how the VC industry is dealing with todayās venture market. Listen here.
š Hear Chris Ailman, the CIO of $307B CalSTRS, discuss how he manages a portfolio with ~40% exposure to private markets. Listen here.
š Hear Robert Picard, Head of Alternatives at $117B AUM Hightower, approaches 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! Iād 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.