That S&P500 slumped 20% in the first six months of 2022, its worst first-half drop in half a century. Meanwhile, the bond market experienced its worst decline on record. A typical portfolio of 60% stocks and 40% bonds produced the worst return since the Great Depression.
Lackluster returns and sickening volatility are prompting more investors to seek alternatives to the public stock and bond markets. They are increasingly investing more of their portfolios in alternative investments such as private equity, hedge funds, real estate and infrastructure. Prequin, a leading data provider for the alternative investment community, projects investments in alternative investments to grow to more than $17 trillion by 2025, a compound annual growth rate of about 10% from 2020 levels. This should drive the continued growth of leading alternative wealth managers Black Stone (BX -2.66%), Brookfield Wealth Management (BAM -1.58%)and KKR (KKR -2.26%).
Benefit from alternatives
Blackstone is the king of the alternative wealth management sector. The company ended the second quarter with industry-leading assets under management (AUM) of $940.8 billion.
Investors are pumping capital into Blackstone’s funds. In the second quarter alone, inflows totaled a staggering $88.3 billion. That was the second-best quarter ever and equaled the total assets under management when it went public in 2007.
Blackstone’s rapidly increasing AUM gives it two revenue streams. A large portion is fee-based assets under management ($683.8 billion at the end of the second quarter), which provides it with recurring management fees. Blackstone reported $1 billion in fee-related revenue for the second quarter, up 45% year over year. In addition, Blackstone generates performance income as its funds meet their return targets. The company posted net income of $1.1 billion in the second quarter, raising its total distributable earnings to over $2 billion.
The company pays out the majority of those earnings to shareholders via a dividend of over 5%. Blackstone is also buying back shares and investing some capital in its funds to further increase shareholder value. As more investor capital flows into Blackstone, the company’s revenue streams will increase, allowing it to continue to grow shareholder value.
Highlight the value of wealth management
Brookfield is another leading global alternative wealth manager. The company had over $750 billion in assets under management at the end of the second quarter.
The company currently has two divisions: Wealth Management and Direct Investment. Brookfield has historically retained a large percentage of its wealth management income for reinvestment in its funds and other investments. However, the company plans to separate those two businesses and spin off a quarter of its wealth management business to shareholders. This allows them to benefit more directly from the value added of the wealth management business.
Brookfield expects its wealth management business to grow its feeable capital to $1 trillion within the next five years. This has enabled the company to double its fee-related revenue to over $4 billion and to realize significant carried interests (its share of profits from assets under management). The spin-off wealth management business is expected to return 90% of that ever-growing revenue stream to investors via a large and growing dividend. In the meantime, investors will retain the benefits of its direct investment strategy and position it for significant value creation as both companies grow in the future.
Keep growing
KKR is another leading global alternative wealth manager poised to capitalize on the rise in alternatives. The company ended the second quarter with $491 billion in assets under management, up 14% year over year. Of that amount, $384 billion was accounted for by fee-based AUM, a 20% increase year-over-year.
The company is working to expand and diversify its business. The company has grown real estate assets under management by 50% over the past 12 months to $114 billion through the launch of new funds and other investment products.
KKR’s growth strategy has paid off. Fee-related revenue grew 40% last year to $2.2 billion. Meanwhile, after-tax distributable earnings are up 60% to $4.1 billion. KKR pays out a portion of that income through dividends. It also retains profits to reinvest in its funds, enabling shareholders to benefit from the returns and upside potential of those investments. KKR expects to continue growing strongly as it launches new funds and other products to capitalize on investors’ growing desire to allocate more capital to alternative investments.
Capitalize on the rise of alternatives
Investors continue to pour money into alternative investments, with industry-wide assets under management expected to surpass $17 trillion by 2025. That will be a major boon for leading alternative money managers Blackstone, Brookfield and KKR. They should continue to grow their assets under management rapidly, allowing them to generate lucrative and recurring fee income and significant performance-related income. That will give them money to pay dividends and invest in their funds, giving shareholders some access to alternatives. These drivers are positioning the companies to create significant value for shareholders in the years to come, which is why investors don’t want to miss out on this tremendous opportunity.
Matthew DiLallo has positions in Blackstone Inc. and Brookfield Asset Management and has the following options: short December 2022 $40 puts on Brookfield Asset Management. The Motley Fool has positions in and recommends Blackstone, Brookfield Asset Management, and KKR. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV. The Motley Fool has a disclosure policy.
