The Standard & Poor’s 500 It fell 20% during the first six months of 2022, the worst first-half drop in half a century. Meanwhile, the bond market experienced its worst drop ever. A typical portfolio of 60% stocks and 40% bonds produced its worst return since the Great Depression.
Lackluster returns and disturbing volatility are driving more investors to search alternatives to the public stock and bond markets. They are increasingly allocating more of their portfolio to alternative investments such as private equity, hedge funds, real estate and infrastructure. Prequin, the leading data provider for the alternative asset community, sees investments in alternatives rising to more than $17 trillion by 2025, an annual growth rate of nearly 10% from the 2020 level. That should drive continued growth to lead alternative asset managers. Black stone (s -2.66%)And the Brookfield Asset Management (Bam -1.58%)And the KKR (KKR -2.26%).
Make money from alternatives
Blackstone is the king of the alternative asset management sector. The company closed the second quarter with industry-leading assets under management (AUM) of $940.8 billion.
Investors are pumping capital into Blackstone funds. Inflows reached $88.3 billion in the second quarter alone. This was its second best quarter ever and equals the total assets under management of its initial public offering in 2007.
AUM from rapidly rising Blackstone is generating two revenue streams. A significant portion of the fee’s assets under management ($683.8 billion at the end of the second quarter), which it supplies with recurring management fees. Blackstone posted $1 billion in fee-related earnings in the second quarter, up 45% year over year. In addition, Blackstone earns performance revenue as its funds meet their revenue goals. The company posted net performance earnings of $1.1 billion in the second quarter, which increased its total distributable profit to more than $2 billion.
The company distributes the bulk of this income to shareholders through yield that produces more than 5%. Blackstone too Share buy back It invests some capital in its funds to enhance shareholder value. As more investor capital flows into Blackstone, the company’s dividend flows will rise, enabling it to maintain increased shareholder value.
Highlight the value of asset management
Brookfield is another leading global alternative asset manager. The company had more than $750 billion in assets under management at the end of the second quarter.
The company currently owns two businesses: Asset Management and Direct Investment. Brookfield has historically held a large percentage of its asset management income to reinvest in its funds and other investments. However, the company plans to separate these two companies and split a quarter of the asset management business to shareholders. This will enable them to benefit more directly from the value generated by the asset management business.
Brookfield expects its asset management business to increase its fee-bearing capital to $1 trillion within the next five years. This enables the company to double its fee-related earnings to more than $4 billion and generate significant carry interest (its share of profits from managed investments). It expects the spin-off asset management business to pay 90% of its steadily increasing income stream to investors through large and growing dividends. Meanwhile, investors will retain the positive side of the direct investment strategy, which puts them in a position to create significant value as both companies grow in the future.
continue to grow
KKR is another leading global alternative asset manager poised to capitalize on the rise of alternatives. The company ended the second quarter with $491 billion in assets under management, up 14% year over year. Of that amount, $384 billion was in fee-managed assets, an increase of 20% year over year.
The company is working on developing and diversifying its business. It has increased its real estate assets under management by 50% in the past 12 months to reach $114 billion through the launch of new funds and other investment products.
KKR’s growth strategy has been paying off. Fee-related earnings increased 40% year-over-year to $2.2 billion. Meanwhile, after-tax distributable earnings rose 60% to $4.1 billion. KKR pays a portion of this income through dividends. It also keeps the profits to reinvest in its money, which puts shareholders in a position to benefit from the income and the rise from those investments. KKR expects to continue to grow rapidly as it launches new funds and other products to take advantage of the growing desire of investors to allocate more capital to alternative investments.
Take advantage of the emergence of alternatives
Investors continue to pour money into alternative investments, with industry-wide assets under management expected to reach $17 trillion by 2025. That would be a huge boon for leading alternative asset managers Blackstone, Brookfield, and KKR. They must continue the rapid growth of assets under management, enabling them to generate profitable and recurring fee income and significant returns based on performance. This will give them money to pay dividends and invest their money, giving shareholders some exposure to the alternatives. These drivers position companies to create significant shareholder value in the coming years, which is why investors won’t want to miss this huge opportunity.
Matthew Dillallo He has positions at Blackstone Inc. and Brookfield Asset Management and has the following options: Short December 2022 $40 he puts on Brookfield Asset Management. Motley Fool has positions at Blackstone, Brookfield Asset Management and KKR and recommends. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV. Motley Fool has a profile Disclosure Policy.