Alternative Asset Managers

[rockket]

Anyone taking a look at these? BX, CG, OAK, APO. Very cursory review, but seem to be trading at decent DE yields (especially compared to traditional asset managers), with optionality from performance income. Don't really understand why these are trading where they are, outside of volatility in distributions. Some upside here if market goes sideways and shift to yield continues.

 

Any insight from the smart people here?

[TwoCitiesCapital]

Anyone taking a look at these? BX, CG, OAK, APO. Very cursory review, but seem to be trading at decent DE yields (especially compared to traditional asset managers), with optionality from performance income. Don't really understand why these are trading where they are, outside of volatility in distributions. Some upside here if market goes sideways and shift to yield continues.

 

Any insight from the smart people here?

 

Active managers in general have been under a lot of pressure. Add OZM to your list. I'm keeping an eye on them, especially OZM and OAK, but have basically been operating under a "don't buy U.S. equities" mode as I'm incredibly bearish on the market as a whole.

 

It would take screaming value (like OZM appears to be getting to) for me to really pull the trigger in the U.S. as a receding tide lowering all boats is a very real concern of mine.

[TBW]

Funny I was starting to look at these today as well.

 

They are down as these stocks tend to move reflexively up in bull mkts (high returns increases AUM, which begets AUM inflows, higher earnings and then investors apply ever higher multiples) with the reverse happening now. 

 

Esp with the high profile AUM reductions in the industry (Calpers pulling out of all hedge funds, high profile guys like Paulson AUM from 38bil to 18bil, OZM AUM from 48bil to 38bil etc ) and fee reductions coming for the industry (Brevan Howard offering 0% management fees on new inv from existing clients to name one).

 

However it appears that this may have been too far extrapolated to the downside.  Starting to look interesting.  Even more so if you think these hf can finally deliver an outperformance if we hit the bear mkt that will come at some point.  Then the reflexivity to the upside kicks in again...

 

Two concerns I have is for the bigger hf guys like OAK how much bigger can they possibly get?  While they are world class 98bil of AUM and then at least half of those assets are probably levered at what pt is that too big (bigger than the mkt) or too big to outperform (which should hurt AUM)?  That said I had the same concerns when they were ~50bil in AUM...  The second is the HF balance sheets can get quite confusing for what should be a simple biz (ie. on quick look today OZM appeared to have negative equity as they had to deconsolidate their CLO's, probably simple explanation but can take a while for me to understand). 

 

The PE guys can be really interesting as they have very long AUM lock-ups and it's much easier to project future fee incomes.

 

Plan on going thru and will let you know if there is one that I find particularly interesting, please do the same.  OZM was the one I was looking at today.

[StevieV]

Anyone taking a look at these? BX, CG, OAK, APO. Very cursory review, but seem to be trading at decent DE yields (especially compared to traditional asset managers), with optionality from performance income. Don't really understand why these are trading where they are, outside of volatility in distributions. Some upside here if market goes sideways and shift to yield continues.

 

Any insight from the smart people here?

 

I don't have a lot of time to reply right now, but I own all four of these.  I think all four of them are undervalued right now.

 

The AAMs should not be confused with traditional asset managers or hedge funds.  They are not investing in the S&P 500 stocks and their AUMs aren't under pressure the same way they are at traditional asset managers.  Depending on the firm, you are talking about large private equity arms, real estate, distressed debt, etc.  There aren't easy passive substitutes for something like a private equity fund.

 

Also, there are significant lock-up periods.  I'm talking about lock-ups on the scale of 8-10 years.  I believe BX has recently started raising funds with a 50 year lock-up.

 

I also wouldn't confuse these companies with hedge funds.  CG has a hedge fund arm, but is actually running it down.  As a general matter, these are much more private equity, real estate and credit firms.

[Spekulatius]

We are in a bull market right now and yet these alternative asset managers stocks are weak - how can we assume that these stocks to up, if the market becomes weak?

[rockket]

We are in a bull market right now and yet these alternative asset managers stocks are weak - how can we assume that these stocks to up, if the market becomes weak?

 

Multiple reasons I think alternative asset managers and yield vehicles outperform in a low-return environment, but if you're expecting a ~5%+ yield off of just management fees with upside from performance, I don't really need share price appreciation.

 

But yes, the stocks aren't performing and I'd like to know why. TwoCities and TBW hit on a couple (AUM shrinking, size concerns, shift from active management), but I don't see PE/RE/credit going away any time soon.

[StevieV]

We are in a bull market right now and yet these alternative asset managers stocks are weak - how can we assume that these stocks to up, if the market becomes weak?

 

I don't think you can assume that these stocks will go up if the market becomes weak.  I think it may take a while for the market to realize the value here, but I think the market eventually will.  Additionally, they generally pay out 85-95% of their distributable earnings (DE), which can be a relatively high yield.  So, you get some yield while you wait and, if you like, you can reinvest at potentially lower prices. 

[thepupil]

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/tfg-tgonf-tetragon-financial/msg269439/#msg269439

 

55% of NAV, 1/4 of NAV is net cash, 6% dividend yield, manages $15B of alternatives and has been growing AUM...it has plenty of warts/issues though

 

[StevieV]

We are in a bull market right now and yet these alternative asset managers stocks are weak - how can we assume that these stocks to up, if the market becomes weak?

 

Multiple reasons I think alternative asset managers and yield vehicles outperform in a low-return environment, but if you're expecting a ~5%+ yield off of just management fees with upside from performance, I don't really need share price appreciation.

 

But yes, the stocks aren't performing and I'd like to know why. TwoCities and TBW hit on a couple (AUM shrinking, size concerns, shift from active management), but I don't see PE/RE/credit going away any time soon.

 

Why aren't the stock prices performing?  Really tough to say for certain, but one would imagine it is due to their variable and cyclical nature.  These companies pay out some percentage of their distributable earnings each quarter (say, roughly 90%).  The distributable earnings vary a lot based on the realizations in any particular quarter.  For example, BX paid out 61 cents in February of this year and then 28 cents the next quarter.

 

I like the variable distribution.  The system avoids trouble from trying to keep a steady and growing distribution.  However, I am not sure the market does yet.  You'll see people howling about a "cut" every time the distribution goes down.  I also think 61, 28, and 36 cents for this year should be better than a steady 15 or 20 cent dividend, but I think a lot of dividend investors still ignore it.

 

I also think this is tough to model.  What is BX's average yearly DE and distribution?  What will it be next year? In 3 years?  How can you measure how fast it is growing or not?  I think it is difficult and you have to make some estimates/assumptions.  Not similar to say a McCormick, KO, JNJ, etc. which you can easily see growing slowly, but steadily.

 

I believe that some funds don't want to deal with the paperwork, which can be extensive given the huge variety of investments that a BX is involved in.  All of these K-1s are significantly more complicated than say a pipeline MLP and BX is particularly complicated.  I would think funds could handle, but have listened to some conference presentations and Q&As that would seem to suggest otherwise.

 

At a simple level, APO distributed $3.11 in calendar year 2014, $1.96 in calendar year 2015 and 90 cents in the 3 distributions paid out so far this year.  Looking at that, I guess it is not surprising that the share price has languished.  Investing in APO requires looking at it a little deeper.  The distributions have gone down, but I don't think the business has faltered any.  Rather, the cyclicality has kicked in.  The 2013 and 2014 distributions may have been a little elevated from great recession buys, but I think distributions head back up eventually as the AUM and product offerings have continued to grow.  Simplistically, when the distribution goes back up, I would guess that the share price will as well.

 

The alts have huge amounts of dry powder and I think they may even be helped by a downturn (better prices for PE, distressed credit, real estate, etc.).  That being the case, I don't think the market sees it that way.  The market may see them as more leveraged plays on markets.  So, I think they could sell off significantly in a market downturn.  Given that they haven't run up in the bull market, maybe that will be a good time to buy.

[Spekulatius]

I don't think the average investor understands these vehicles. The complex ownership structure (with an operating LLC), the variable nature of the earnings and distributions and the multiple operating metrics (GAAP earnings, operating earnings , distributable cash flow) are making them hard to understand. I have been loosely following OAK for example and I am really not sure how to fully value this business and what the normalized earnings or distributsble cash flow may look like.For investing in yield vehicle, I have generally invested in pipeline MLPs, which ai found much easier to understand.

 

I do think that these alternative asset manager have hit the wall on growth as well and fees seem to be under pressure.

[StevieV]

I don't think the average investor understands these vehicles. The complex ownership structure (with an operating LLC), the variable nature of the earnings and distributions and the multiple operating metrics (GAAP earnings, operating earnings , distributable cash flow) are making them hard to understand. I have been loosely following OAK for example and I am really not sure how to fully value this business and what the normalized earnings or distributsble cash flow may look like.For investing in yield vehicle, I have generally invested in pipeline MLPs, which ai found much easier to understand.

 

I do think that these alternative asset manager have hit the wall on growth as well and fees seem to be under pressure.

 

I agree with most of this.

 

(1)  I don't think most investors understand these companies.  As you say, earnings are variable.  Also, ENI, ANI or DE measures are generally used and discussed rather than EPS.

 

(2)  Deciding on a normalized earnings number (say DE) requires estimation and estimates will vary.  Even if you agree on a valuation (say a multiple of normalized DE), it will depend on what you estimate the normalized DE to be.

 

(3) Taxes are complicated.  At least one of the conferences I listened to suggested that some funds won't invest because their back office functions tell them not to.  Sounds like a terrible back office to me, but maybe some truth to that.  For individuals, I can imagine avoiding if it is only going to be a small percentage of your portfolio.  I am not sure it is worth the hassle for a position of 1% or less.  As mentioned above, the BX K-1 is much more complicated than pipeline K-1s that I have seen.

 

(4)  Compared to something like a pipeline investment, I really like the lack of parent level debt at the alts.

 

(5)  It can be difficult to tell for sure, but I disagree that the alts have hit a wall on growth or that they are necessarily getting hit hard on fees.  Companies like this have some built-in natural growth based on the increase in financial assets.  Allocations to alts have been growing and according to surveys they tout (take that for what it is worth), allocations to alts are expected to increase.  Finally, smaller alts are being pushed out in favor of the larger ones (BX, OAK, CG and APO all being larger ones).  BX claims they aren't seeing a lot of fee pressure.  I think the best indication of fee pressure is actually AUM growth.

 

(6)  Even if I am wrong about growth, I think they will be ok (but not great).  Taking a simple example, CG pays out about $2/year and is trading around $15.  If they are growing, that $2 could make it to $4 in 10 years and buying now should be very satisfactory.  However, even if the $2 is flat (and not declining), that should be ok.  I think CG is at least on a flat trajectory.

 

(7)  I would prefer the stocks stay low and the businesses perform well.