Alternative asset managers (XLF) deployed record funds towards corporate credit and rate offerings in 1H16 due to distressed credit pricing. The credit markets have seen a rebound in 2H16 on energy prices (USO), improved corporate operating performances, and rising broad markets. However, as the Fed is expected to raise rates three times in 2017 for a total of 75 basis points, bond prices could fall as interest expectations rise. Alternatives could deploy lower capital in 1H17 and higher realizations during the same period.
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In 4Q16, Blackstone Group’s (BX) credit division reported a rise in revenue to $258.6 million compared to $22.7 million in 4Q15. The division’s economic net income (or ENI) rose to $124.4 million compared to $5.7 million in 4Q15. The division managed strong composite gross returns of 4.7% in performing credit and 6.4% in distressed strategies, higher than the returns in the company’s other divisions.
As of December 31, 2016, Blackstone was managing $93.3 billion for credit markets, up 18% year-over-year. The company has deployed funds across senior credit targeted funds, mezzanine funds, distressed funds, and general credit targeted funds.
The Carlyle Group (CG) has seen some rebound in its global market strategies (or GMS) segment, which invests in credit markets. In 4Q16, the company saw 2% appreciation of its credit markets portfolio as compared to zero or negative growth over the past five quarters. The division also saw net accrued performance fees of $35 million in 4Q16.
KKR’s (KKR) public market segment reported total revenues of $109 million in 4Q16 as compared to $55 million in 4Q15. Public markets’ performance fees rose to $23 million as compared to a loss of $18 million in 4Q15 and income of $21 million in the previous quarter.
Apollo Global Management (APO) also deploys funds in credit markets with 12% of its total portfolio deployed in special situations, direct lending, and mezzanine debt as of December 31, 2016.
In the next part of this series, we’ll study how alternative management funds are deploying their record amounts of dry powder.