RIA Valuation Insights

A weekly update on issues important to the Investment Management industry


Alternative Asset Managers

Asset Management Industry Trends

Market Resilience: Asset Managers Thrive Amidst Economic Volatility in 2023

Despite persistent inflation, elevated interest rates, and heightened geopolitical tensions, the asset management industry and the stock market as a whole saw a resurgence during 2023.  Our index of publicly traded asset management firms generally tracked the movement in the broader market, with stock prices for smaller asset managers (AUM under $250 billion) up 30.3% and large asset managers (AUM over $250 billion) up 22.0% over the year ended March 31, 2024, while the broader market (S&P 500) was up 29.9%. Read more about the market’s resilience and future outlook in this week’s post.

Asset Management Industry Trends

Alt Managers Race Ahead

A Resurgent Year for Investment Management Firms

In the recent financial landscape, alternative asset managers have significantly outpaced other categories, particularly in the RIA sector, demonstrating resilience and impressive gains amidst market volatility. While traditional asset managers have seen some pressure, larger entities, especially those in private equity, experienced notable growth and stability, largely due to their robust structures and strategic partnerships. The current trends underscore the importance of understanding nuanced market shifts, what these developments mean for various asset managers, and investment approaches in an evolving economic climate.

Major Acquisitions of Alternative Asset Managers Signal Continued Outperformance

Alternative asset managers have outperformed all other investment manager sectors in the RIA post-pandemic rebound. According to Institutional Investor, eight of the world’s ten largest investment management firms by market capital are now alternative asset managers. In the past month alone, three deal announcements of alternative asset managers by larger, traditional asset management firms and diversified financial institutions suggest the sector remains bullish.

In this week’s post, we discuss these three deals and determine several driving factors in investor demand for alternative assets and for alternative asset management firms.

Public Alt Asset Managers Have Nearly Doubled in Value Over the Last Year

Hedge Funds and Private Equity Firms Capitalize on Market Volatility and Growing Investor Appetite for Alt Asset Products

Over the last year, alternative asset managers have bested the market and most other categories of investment management firms by a considerable margin. Favorable market conditions, heightened volatility, strong investment returns, and growing interest from institutional investors are the primary drivers behind the sector’s recent rally. Before this uptick, many alternative asset managers had struggled over the last several years.
In this post, we give an overview of the investment management history and summarize what the recent improving performance of the alt asset sector could mean for the industry.

Industry Trends

Strong Quarter Propels Alt Managers to New Highs

The second quarter was especially kind to the alt manager sector, which benefited from favorable market conditions and growing interest from institutional investors. These trends initially took root last Fall before gaining considerable momentum in the second quarter.

Asset Management

2020 Alternative Asset Manager Update

Are Sustainable Investments the Future of Investment Management?

The market for sustainable investments has grown to over $12 trillion in the U.S. and the movement of investable assets into sustainable strategies is expected to accelerate. In this week’s post, we link to the newly published 2020 Alternative Asset Manager Update authored by Taryn Burgess, CFA, ABV. The update reviews the growth of sustainable investing over the last decade and considers the valuation implications for your RIA.

Outlook for Alternative Asset Managers During COVID-19

Despite the global pandemic, the long-term outlook for most alternative asset managers appears healthy due to strong investor interest and emerging opportunities caused by market dislocation. In the near term, however, managers with large exposure to highly affected industries, or those that have seen large asset outflows, are likely to see their valuations decline. Managers with less exposure to highly affected industries and those whose strategies and fundraising are poised to benefit from the current environment are likely to see valuations increase.

Alternative Asset Managers

Performance Update

In May of this year, assets in passively managed funds equaled assets actively managed for the first time in history.  As investors seek low-cost solutions, alternative managers are working to solidify their place in investors’ portfolios.  Despite the headwinds the asset management industry faces, most investors still value the diversification offered by alternative assets, particularly late in the economic cycle.  In this post, we take a closer look at how alternative asset managers are performing in light of the broader shift from active to passive management and increased fee pressure.

Alternative Asset Managers

Segment Focus

Alternative investment managers took off in the wake of the financial crisis when investors flocked to risk mitigating strategies and uncorrelated asset classes; however, during 2015 and 2016 these businesses floundered against a backdrop of strong equity market performance.  Alt managers bounced back in 2017, and over the last twelve months, have continued to perform well.  Despite improving performance over the last two years, the industry continues to face a number of headwinds, including fee pressure, expanding index opportunities, and relative underperformance.

Alt Managers Bounce Back After Years of Underperformance

We think performance fees will likely continue to fall (in one form or another), but, like active management, never be totally eliminated.  So on balance, a modestly improving outlook for the sector is probably justified after a rough 2015 and 2016 for most industry participants.

Industry Trends

IPO Supply and Demand

The stock market rallied in the first five months of the year, with the Dow Jones and S&P 500 reaching record highs and continuing to climb. Nevertheless, IPOs remain scarce compared to prior years.

Corporate Venture Capital Trends

With the rapid rise of corporate venture capital and increasing pressure to jump on board with startups, it seems that many companies across the industry spectrum are making venture investments.

Portfolio Valuation and Regulatory Scrutiny

Over the past decade, we have been retained by several investment funds to assist them in responding to formal and informal SEC investigations regarding fair value measurement of portfolio investments. Reflecting back on those engagements yields a couple observations and reminders for funds and fund managers as they go through the quarterly valuation process.

Recent Bribery Scandal, Another Blow to Alternative Asset Managers

Just a few days ago, the largest publicly traded hedge fund, Och-Ziff Capital Management Group, agreed to pay $413 million to settle federal charges that it disbursed more than $100 million in bribes to African government officials. Even before this announcement, the hedge fund industry was in quite the slump.

Non-Traditional Venture Investors are Changing The Rules Of The Game

After a steady build up since the end of the credit crisis, it appears that 2016 is going to be marked as the year when the venture capital industry lost momentum, although not for a lack of investors. The birth rate of new unicorns has slowed considerably since their 2015 baby-boom, even as the VC market remains dominated by tremendous inflows of capital in late-stage companies. Money has continued to pour in as riskier VC investments are still expected to outperform listed alternatives due to volatile public markets, higher multiples, low interest rates, and the less-than-stellar performance of the global economy. The source of new capital has changed, however, as the venture industry saw a marked increase in nontraditional investors – including pension plans, hedge funds and mutual funds.

Performance Fees are Dead! Long Live Performance Fees!

Earlier this month, Mercer Capital had the pleasure of helping sponsor the Southern Capital Conference, an annual gathering of venture capital and private equity GPs, as well as the LPs who invest with them. If you believe everything you read about this segment of the investment community, you might expect a fair amount of groaning from the General Partners, with private equity managers under pressure to improve performance, negotiate fees, and increase transparency. The reality was very different.

Twilio and the Rise Of Debt Financing

Unfavorable IPO market conditions have led many companies to alternative exits such as M&A, but a growing number of venture capital firms have also turned towards another source for cheap cash: debt.

SEC Regulation May be Coming for the Private Market

In for a Dime, In for a Dollar

Recently, SEC Chair Mary Jo White gave a keynote speech to attendees of the SEC’s and Rock Center’s Silicon Valley Initiative, an event bringing together regulators, academics and entrepreneurs to discuss issues affecting venture capital and private equity within Silicon Valley. Although the audience may have been targeted, White’s speech provides insight into the SEC’s concern over the lack of transparency, governance and oversight in the PE and VC industries.

Current Events Transactions

AMG Sees Opportunity in Alt Asset Space

Value Play or Falling Knife?

Last week, Affiliated Managers Group (ticker: AMG) announced the completion of its investment in three alternative asset managers – Capula Investment Management LLP, Mount Lucas Management LP, and Capeview Capital LLP. This post discusses this transaction against the dim alternative asset management market environment.

Marking Illiquid Investments in Liquid Funds

As mutual fund flows continue to favor passive strategies, some active fund managers are beginning to look to alternative asset classes to augment returns and generate sustainable alpha. Since open-end funds need to calculate NAV on a daily basis, the inclusion of illiquid venture capital investments in liquid funds shines a brighter spotlight on fair value measurement.

Investment Management

Mercer Capital provides RIAs, trust companies, and investment consultants with corporate valuation, litigation support, transaction advisory, and related services