Lower-for-Longer Rates Should Fuel Flows for Alt-IMs

Alternative investment managers (Alt-IMs) are seeing various unexpected benefits as a result of the economic fallout of the coronavirus pandemic, with the outlook for interest rates in most major economies remaining low through 2023 expected to fuel inflows, Fitch Ratings says. Lower rates should continue to benefit Alt-IMs as investors seek to deploy capital into potentially higher-yielding private asset classes, while partnerships with insurance companies may become even more compelling. Other tailwinds for Alt-IMs in the face of the pandemic include longer periods of base fee generation, as the pace of realizations slow.

Alt-IMs have experienced strong fundraising in recent quarters, despite an inability to meet in-person with prospective investors, with several firms in Fitch’s rated universe logging record inflows in 2Q20. Brookfield Asset Management’s $23 billion of new capital in 2Q20 benefited from Oaktree’s flagship distressed debt fundraise, while KKR and Apollo each collected $16 billion of inflows, excluding transactions in Apollo’s insurance platform. Ares also had one of its strongest fundraising quarters, with more than $9 billion gathered in 2Q20. Dry powder, or uncalled capital, soared to $433.8 billion at Sept. 30, 2019 for Fitch-rated alternative investment managers, up 21% year over year.

Alt IMs are well positioned to deploy capital amid the current market fallout, having meaningfully scaled and diversified their platforms since the global financial crisis. While social distancing guidelines have prevented managers from performing due diligence in the traditional way, firms are quickly adapting to virtual interactions and deployment activity is expected to increase. An accelerated pace of deployment could lead to faster capital raises, benefiting Alt-IM credit profiles through an increase in management fees and fee-related EBITDA (FEBITDA).

Many Alt-IMs are expecting realizations to slow near-term given questions around valuation. Still, the strong market environment has fueled IPOs, which are on track for a record year, with nearly $100 billion raised year to date. Several companies have been turning to special-purpose acquisition companies (SPACs) to access public markets instead of the traditional IPO structure, and these SPACs could become a more meaningful buyer of assets from alt-IMs. While slower fund realizations would hurt incentive income generation, retained assets would continue to contribute to management fees and FEBITDA, which would be deemed a credit positive.

The low rate environment is also creating further appetite for tie-ups between Alt-IMs and insurance companies. Alt-IMs are increasingly focused on penetrating the insurance market through affiliated relationships and permanent capital vehicles as the relationships provide access to captive capital. Alt-IMs gain a steadier source of investment capital from the flow of insurance premiums, while insurance companies potentially see higher investment returns by steering more of the investment portfolio into alternative assets.

Today, Ares announced an agreement by its insurance subsidiary, Aspida Holdings, to acquire F&G Reinsurance Ltd., a Bermuda-domiciled life and annuity reinsurer with approximately $2 billion in invested assets as of June 30, 2020. Also, in July 2020, KKR announced its intention to acquire life insurer Global Atlantic for an amount equal to 1.0x book value, or approximately $4.4 billion. The transaction, which will add about $72 billion of AUM, is expected to close in early 2021. Other notable insurance affiliations include Apollo’s ownership interest in Athene Holding Ltd., Blackstone’s partnerships with Fidelity & Guaranty Life and Harrington Reinsurance and Carlyle’s majority ownership of Fortitude Holdings. Fitch believes additional transactions are likely in the sector over time.

Contact:

Dafina Dunmore, CFA
Director, Non-Bank Financial Institutions
+1 312 368-3136
Fitch Ratings, Inc.
One North Wacker Drive
Chicago, IL 60606

Meghan Neenan, CFA
Managing Director, Non-Bank Financial Institutions
+1 212 908-9121
Fitch Ratings, Inc.
300 West 57th Street
New York, NY 10019

Nathan Flanders
Managing Director, Non-Bank Financial Institutions
+1 212 908-0827

Laura Kaster, CFA
Senior Director, Fitch Wire
Financials, North and South America
+1 646 582-4497
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