How the Rate Hike Could Affect Alternative Funds’ Credit Markets
The credit market saw distressed pricing in 2H15 on lower bond pricing, mainly due to oil prices (USO) and interest rates. Alternative asset managers (XLF) deployed funds toward credit offerings in 4Q15 and 1H16.
As prices recovered in 2H16, alternatives saw strong performances in the form of higher base and performance fees. This trend is expected to continue in 4Q16, but profits could fall marginally in 1H17, as the Federal Reserve raised the interest rate in 4Q16.
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In 3Q16, Blackstone Group’s (BX) credit division reported a rise in revenue to $266 million, up 384% from the prior year’s quarter. The division’s economic net income (or ENI) rose to $130 million, mainly due to its improved performance in terms of its performing credit and distressed strategies.
Blackstone was managing $89 billion in various credit strategies on September 30, 2016. The company has managed 10% growth over the past year. It’s also managed capital rises across its mezzanine funds, collateralized loan obligations (or CLOs), separately managed accounts, and leveraged loan strategies.
Carlyle’s GMS, KKR’s Public Market
The Carlyle Group (CG) has seen losses in its Global Market Strategies (or GMS) segment, which invests in credit markets. However, in 3Q16, the company saw some stabilization, with similar valuations of its holdings. The credit market improved in 3Q16 as oil prices rebounded. Fundamentals also improved, resulting in higher bond prices.
KKR & Co.’s (KKR) Public Market segment also saw improved performance on revenue of $84 million in 3Q16, compared to $64 million in 3Q15. The segment’s performance fees rose to $21 million, compared to -$33 million in 3Q15.
Apollo Global Management (APO) has also managed credit holdings growth in recent quarters, mainly due to valuation rises in its distressed mezzanine debt and corporate debt.
In the next part of this series, we’ll discuss how alternative management funds are using their record amounts of dry powder.