the S&P 500 it fell 20% during the first six months of 2022, its worst first-half drop in half a century. Meanwhile, the bond market experienced its worst drop on record. A typical portfolio of 60% stocks and 40% bonds produced its worst performance since the Great Depression.
Lackluster returns and sickening volatility are driving more investors to seek alternatives to the public stock and bond markets. They are allocating more and more of their portfolio to alternative investments like private equity, hedge funds, real estate and infrastructure. Prequin, a leading provider of data to the alternative asset community, forecasts investments in alternatives to rise to more than $17 trillion by 2025, an annual growth rate of about 10% from the 2020 level. That should drive the continued growth of leading alternative asset managers. black stone (BX -2.66%), Brookfield Asset Management (BAM -1.58%)Y KKR (KKR -2.26%).
Take advantage of alternatives
Blackstone is the king of the alternative asset management industry. The company ended the second quarter with an industry-leading $940.8 billion of assets under management (AUM).
Investors are pouring capital into Blackstone funds. Inflows were a staggering $88.3 billion in the second quarter alone. That was the second best quarter in its history and equal to its total AUM in its initial public offering in 2007.
Blackstone’s rapidly growing AUM gives you two streams of income. A large portion is fee-generating AUM ($683.8 billion at the end of Q2), providing you with recurring management fees. Blackstone posted $1 billion of fee-related profit in the second quarter, up 45% year over year. In addition, Blackstone earns performance income as its funds meet their return targets. The company posted $1.1 billion of net performance gains in the second quarter, increasing its total distributable earnings to more than $2 billion.
The company distributes most of this income to shareholders through a dividend that yields more than 5%. Blackstone also buys back shares and invests some capital in its funds to further enhance shareholder value. As more investor capital flows into Blackstone, the company’s earnings streams will increase, allowing it to continue to increase shareholder value.
Highlight the value of asset management
Brookfield is another leading global alternative asset manager. The company had more than $750 billion of AUM at the end of the second quarter.
The company currently has two businesses: Asset Management and Direct Investment. Brookfield has historically retained a large percentage of its asset management income to reinvest in its funds and other investments. However, the company plans to separate these two businesses and spin off a quarter of its asset management business to shareholders. That will allow them to benefit more directly from the value created by your asset management business.
Brookfield expects its asset management business to grow its fee-based capital to $1 trillion over the next five years. That positions the company to double its fee-related earnings to more than $4 billion and earn significant accrued interest (its share of earnings from managed investments). He expects the derivative asset management business to pay 90% of that ever-growing income stream to investors through a large and growing dividend. Meanwhile, investors will retain the advantage of their direct investment strategy, positioning them for significant value creation as both businesses grow in the future.
continuing to grow
KKR is another leading global alternative asset manager that is ready to capitalize on the rise of alternatives. The company ended the second quarter with $491 billion of AUM, up 14% year over year. Of that amount, $384 billion was fee-paying AUM, an increase of 20% year over year.
The company has been working to grow and diversify its business. It has increased its real estate AUM by 50% in the last 12 months to $114 billion by launching new funds and other investment products.
KKR’s growth strategy has paid off. Fee-related profits are up 40% over the past year to $2.2 billion. Meanwhile, after-tax distributable earnings have soared 60% to $4.1 billion. KKR pays out a portion of that income through dividends. It also retains earnings to reinvest in its funds, positioning shareholders to capitalize on the income and potential produced by those investments. KKR expects to continue to grow rapidly as it launches new funds and other products to capitalize on investors’ growing desire to allocate more capital to alternative investments.
Harnessing the rise of alternatives
Investors continue to pour money into alternative investments, with industry-wide AUM expected to exceed $17 trillion by 2025. That will be a boon to leading alternative asset managers Blackstone, Brookfield and KKR. They should continue to rapidly increase their AUM, allowing them to generate lucrative recurring fee income and significant performance-based income. That will provide them with money to pay dividends and invest in their funds, giving shareholders some exposure to alternatives. These drivers position companies to create significant shareholder value for years to come, which is why investors won’t want to miss out on this huge opportunity.
Matthew DiLallo has positions in Blackstone Inc. and Brookfield Asset Management and has the following options: short December 2022 $40 puts in Brookfield Asset Management. The Motley Fool has positions 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.