Equities and broader markets rebounded in 2H16. The global economic outlook has now become relatively more stable for 2017. Retail and institutional investors have deployed more funds toward equity, real estate, and structured offerings. Alternative managers (XLF) have successfully raised new funds toward various asset classes.
However, companies face competition from cost-effective ETF offerings from BlackRock (BLK), Vanguard, and State Street (STT). Alternative managers have to consistently demonstrate alpha generation or superior returns in order to attract more funds.
Fundraising in recent quarters has enabled alternative managers to maintain record dry powder. Alternative funds can deploy dry powder when it will bring good investment opportunities at lower valuations. The broader market (SPY) and the real estate sector have appreciated in recent quarters as earnings have improved across sectors. Fund managers deploy less capital in the event of a rate hike and higher valuations. Any fall in valuation can attract more investment as fundamentals improve globally.
Blackstone Group (BX), the biggest alternative asset manager, attracted $14.7 billion across its offerings in 3Q16, bringing its total over the past year to $68.5 billion. These inflows resulted in record dry powder of $102.2 billion, a rise of 20% on a year-over-year basis.
KKR & Co. (KKR) also raised $4.8 billion in 3Q16, bringing its total to $28 billion over the past 12 months. The company saw higher distributions of $8.2 billion on higher realizations, and it saw a market appreciation of $3.4 billion during the same period.
Apollo Global Management (APO) saw strong fundraising of $7 billion and deployed $5 billion in the quarter. The company had $24.4 billion in dry powder. It’s raising new funds in private equities, credit markets, and hedge funds.
Among alternatives, The Carlyle Group (CG) has seen subdued growth. It’s witnessed a consistent fall in its assets under management (or AUM) due to its distributions being higher than its fundraising and deployments. In 3Q16, the company saw an inflow of $1 billion, a fall of 10% in its AUM year-over-year. It had total dry powder of $54 billion.
Next, let’s study how alternatives are maintaining their distributions amid volatile markets.