Shares of leading alternative asset managers Blackstone (BX +1.37%), Brookfield (BN +3.76%)(BAM +0.00%), and KKR (KKR +3.01%) have gotten hammered over the past year. Since the bull market ended early last year, they've lost more than 20% of their value. A big factor weighing on their shares has been the potential impact of rising interest rates on institutional investors' appetite for the alternative investments they manage.
However, according to a recent survey by State Street, institutions remain hungry for alternatives. It found that 68% of respondents plan to keep their allocation to private market investments in line with their current targets. This outlook bodes well for the leading alternative asset managers as it suggests money will continue to flow into their funds. That means they will continue to generate lots of management fees to support their dividends.
NYSE: BX
Key Data Points
The state of alternatives
Institutional investors -- pension funds, sovereign wealth funds, and insurance companies -- have flocked to alternatives to the stock and bond markets, such as private equity, credit, real estate, and infrastructure funds. Private market assets have historically delivered attractive total returns with less volatility than public markets.
However, with the Federal Reserve raising interest rates, private market investments could lose their appeal. Higher rates make lower-risk income-producing investments like bonds and CDs more attractive relative to private credit, real estate, and infrastructure investments. Meanwhile, higher rates increase borrowing costs for private equity buyout funds, which could affect returns.
Despite these headwinds, most institutional investors expect to stick with their private markets' investment strategies. However, many do intend to be more critical of their investments. State Street's survey found that 47% of respondents plan to make changes to their due diligence process, while 42% plan to narrow the universe of investments they'll consider as they set a higher baseline standard.
The flight to quality
Those increased standards should benefit the biggest players in alternatives due to their ability to deliver better results. Blackstone's funds achieved stunning outperformance last year. Meanwhile, KKR's opportunistic real estate and infrastructure portfolios posted positive returns, its traditional private equity portfolio outperformed the stock market, and its credit investments outpaced bonds.
NYSE: KKR
Key Data Points
Institutional investors continue to pour capital into their funds. KKR raised $81 billion of new capital last year, helping grow its assets under management (AUM) by 7% to $504 million. Blackstone's inflows were $226 million, boosting its AUM by 11% to nearly $975 billion. Brookfield's alternative fund inflows were $33 million during the third quarter, with its fee-bearing AUM reaching $407 billion.
The rise of retail
State Street's survey also found that 66% of private market managers believe that retail investors would benefit from increasing their allocation to alternatives to increase diversification. That also bodes well for the big three because they've started to create products geared toward high-net-worth individual investors.
Blackstone's core retail product is its non-traded REIT, Blackstone Real Estate Investment Trust (BREIT). While that investment vehicle has faced some recent headwinds as more retail investors seek to redeem their shares, it has been a significant growth driver for the company. It should become a growth driver again as BREIT continues to deliver differentiated results compared to publicly traded REITs.
Blackstone's success with BREIT has led KKR and Brookfield to create non-traded REITs in recent years to tap into the massive opportunity as retail investors increase their allocations to alternatives.
Income with upside
Blackstone, Brookfield, and KKR have been under a lot of pressure over the past year due to concerns that investors might shift away from alternatives as higher rates make other investments more appealing. However, that doesn't seem to be the case. Most institutional investors lean toward maintaining their allocations, while retail investors could increase theirs.
These companies should continue to generate a lot of fee-based income to support their dividends. Brookfield and KKR have recently announced plans to increase their payouts, while Blackstone has paid a sizable dividend over the past year. Add that income to their upside opportunity as the weight starts to lift from their stock prices, and this trio could produce strong total returns in the coming years.
