Alternative asset managers (XLF) like to deploy funds at lower valuations, especially in distressed markets.
Currently, valuations have risen across asset classes. However, any rate hike by the Fed could lead to correction across markets, which could trigger increased deployment by alternatives. Managers with record amounts of dry powder and commitments could benefit.
Blackstone (BX) has continually attracted a large amount of capital backed by the strong operating performances of its various funds. The company has continued to attract new capital across its product offerings.
The company’s total dry powder rose by 37% to a record $88.6 billion in 2Q16, compared to the same quarter last year. This rise in undrawn capital was driven by fundraising for the latest global private equity and real estate funds. Blackstone made significant realizations in the real estate and private equity segments.
The Carlyle Group (CG) had total dry powder of $55.1 billion, forming 32% of its total assets under management (or AUM) on June 30, 2016, reflecting its solid funding power. The company’s dry powder included $20.6 billion in corporate private equity, $5.3 billion in global market strategies, $14.5 billion in real assets, and $14.8 billion in investment solutions.
KKR & Co. (KKR) raised $20 billion in new capital in 2015, resulting in record dry powder. The company is making investments in distressed credit and energy to take advantage of lower valuations.
Apollo Global Management (APO) had $24.9 billion in dry powder as of June 30, 2016. The number included $10 billion in AUM with a future management fee potential.
Alternative asset managers hold between $4 billion and $10 billion on their balance sheets in the form of cash and short-term equivalents, reflecting strong liquidity. Blackstone has generated a 28% return on equity in the last year, the highest among its alternative investment peers, which make up part of the iShares Dow Jones US Financial ETF (IYF).
Next, let’s see how alternatives are maintaining high payouts amid falling profits.