Pursuing growth via alternative assets

As passive investments like ETFs gain ground, active managers are pursuing deals for alternative assets to boost AUM and fee revenue.

Vineet Wilson

Vineet Wilson

Principal, Advisory, Strategy, KPMG US

+1 312-665-1542

Asaf Buchner

Asaf Buchner

Director Advisory, Strategy, KPMG US

+1 212-997-0500

The alternatives space has been extremely active in 2021. As managers of traditional active strategies continued to lose ground to low-cost, passive exchange-traded funds (ETFs), many looked for growth at the more fee-rich end of the asset spectrum—alternative assets such as private equity, private credit, real estate and hedge funds. “Alts” have long been sold to institutional and high-net-worth clients as non-correlated, high-return vehicles. Demand for these investments is rising, driving deals not only by traditional asset managers hoping to offer alts to their clients, but also within the alts business.

Several types of transactions involving alternative assets are currently trending:

Traditional managers buying alts managers. This is the most direct way for traditional managers to increase assets under management (AUM), earn higher fees, expand their client base and—by adding AUM not directly correlated with public markets—diversify their revenue mix. Examples of traditional managers buying alts in 2021 included T. Rowe Price buying alts credit manager Oak Hill Advisors and J.P. Morgan Asset Management’s purchase of Campbell Global, which manages forests and timberland.

Bulking up. These deals typically add AUM and improve diversification of existing alts product lines. One such deal was Ares Management’s 2021 enhancement of its real estate capabilities via the acquisition of real estate manager Black Creek Group. Blackstone opted for diversification in its late-2020 acquisition of DCI, a quantitative credit manager that became part of Blackstone Credit.

Going upstream to enhance investment management capabilities. Some alts managers are looking to enhance access to private credit opportunities by moving upstream in the product lifecycle. Apollo, for instance, continues to expand its private credit capabilities by aggressively adding loan origination businesses, which offer better access to investment opportunities and the potential for higher returns. In 2021, Apollo acquired a UK mortgage lender (Foundation Home Loans), an originator of commercial-property loans (Petros), majority stakes in a home-improvement lender (Aqua) and a technology-driven mortgage lender (Newfi), and a 50 percent stake in an Australian property lender (MaxCap).

Expanding retail distribution. Because of the growing popularity of alternative investments, there has been an increased focus on bringing alts products to high-net-worth retail investors. Companies such as iCapital Network and CAIS offer technology platforms that enable wealth advisors to purchase and sell private investments such as real estate, hedge funds and private equity. Both companies have been raising capital from investors that include alts managers. In 2021, for example, iCapital Network completed two funding rounds with Blackstone and Goldman Sachs Asset Management, among others.

Partnering with insurance carriers. Asset managers, especially those with a strong private credit focus, are attracted to insurance carriers’ “sticky” AUM. Brookfield Asset Management Reinsurance Partners purchased a minority stake in American Equity Life (AEL) in 2021 and agreed to reinsure $10 billion of AEL annuity policies. Other notable insurance-related transactions last year included Apollo’s acquisition of Athene and Blackstone’s strategic partnership with AIG.

We expect these trends—and M&A activity in asset management overall—to remain brisk in 2022 for several reasons:

  • The asset management industry is in an extended consolidation period as firms aim to boost their AUM and build scale to offset fee compression and rising costs.
  • Large traditional managers want to plug holes in their product lines and become multi-asset providers, which will make them more attractive to investors and advisor platforms.
  • Alts managers are increasingly appealing acquisition targets, enabling traditional firms to add asset classes that are not correlated with traditional categories.
  • Similarly, alts managers see traditional firms as desirable targets. Traditionals offer alts managers access to expanded distribution capabilities and a wider range of products to sell to institutions.
  • Strategic partnerships between alts managers and insurance carriers are expected to grow, as asset managers look to capitalize on insurance carriers’ permanent capital and carriers seek access to high-performing investment management capabilities.