It's a billion-dollar industry, but few individual investors are invited to invest in their funds. Alternative asset managers including Blackstone and Oaktree Capital Group manage billions of dollars of wealth on behalf of investors, clipping outsize management fees and incentive fees along the way.
In this segment from Industry Focus: Financials, join The Motley Fool's Gaby Lapera and Jordan Wathen for a brief discussion of how the industry works, and what the word "alternative" means when it comes to investing.
A full transcript follows the video.
This video was recorded on April 24, 2017.
Gaby Lapera: If you're already lost, that's totally OK. We're going to do our best to explain everything, or at least something. Today's question is actually based on some feedback that we got from a listener at the University of Chicago. I forgot to ask his permission to use his name, so we won't, but thank you so much for the great questions. Good luck with your junior year. That's always a long, hard slog.
This is what the listener had to say: "I wanted to hear your thoughts on investing in alternative asset management firms, i.e. Oaktree, KKR, Blackstone. Many have claimed that these firms are trading at a discount for a number of reasons. Their business models and financial statements are egregiously difficult understand, frustrating many retail and institutional investors. There's a drastic variability in yearly results. And profitability is highly dependent on assets under management." My answer to you is yes, yes, yes, and yes. We'll backtrack first. Alternative asset managers are confusing, so let's start at the beginning. What is an alternative asset manager? Jordan, to you.
Jordan Wathen: To put it very simply, an alternative asset manager is an asset manager that manages alternative assets. I guess the more important thing is, what is an alternative asset? The best description is that an alternative asset is something that the average Joe isn't likely to own as part of their portfolio. Think things like private equity or venture capital or distressed debt, for example.
Lapera: It also includes stuff like real estate, if it's not just your house, or certain collectible stuff like artwork, but that tends to be very exotic.
Wathen: Right, I shouldn't forget about artwork. I guess, when you think about alternative assets, there's really two things that sets them apart. The first thing is that they're illiquid: They take time to buy and sell. The strategies that these managers use take time to generate returns. For example, Blackstone might by a private company for one of its funds and then hold that company for seven or 10 years before it sells that company and distributes the profits to its investors. A distressed debt fund might buy debt with the goal of taking control of a company in bankruptcy, which is a long slog, a nasty process, and it takes time to generate returns that way, too. So, these funds typically have a lock-up period in which investors can't access their money for five or even 10 years. And actually, there's been some effort by the Blackstones of the world to extend this lock up period for as long as 15 or 20 years.