Fitch Ratings published a special report titled U.S. Alternative Investment Managers: An Industry Update on November 12th. The report, authored by Fitch analyst Meghan Neenan and team, offers an update on the current financial condition and outlook for the seven major U.S.-based alternative investment managers.
In the introduction to the report, Neenan et al. note: “Fitch Ratings recently affirmed the long-term issuer default ratings (IDRs) of seven alternative investment managers (AIMs) as part of an annual sector review. The rating actions were supported by strong management teams, globally diverse product platforms, consistent operating fundamentals, continued growth in fee-earning assets under management (FAUM), solid incentive income generation and sound liquidity profiles.”
High level of dry powder a concern
Uncalled investment capital (dry powder) is at near-historically high levels, giving general partners plenty of opportunity to invest while credit markets are competitive and valuations are high. The seven AIMs tracked in this report had aggregate dry powder of $254.4 billion as of Sept. 30, 2015, up 35.2% year over year. The Fitch analysts point out that the “outsized vintage concentrations could lead to fund underperformance, although, positively, the pace of investment has declined in 2015, potentially evidencing manager restraint.”
Alternative investment managers: Realizations reach new highs
Based on Preqin data, the aggregate volume of private equity-backed exits was a record $452.8 billion in 2014, and activity through the first nine months of 2015 is just 1.8% off that record pace. Also of note, fund distributions hit a new record of $779.4 billion in 2014, up 37.1% from the prior record in 2013. The unrealized PE fund value grew 4.8% last year, amounting to nearly $2.7 trillion at year end 2014, an impressive 113.4% increase from the pre-crisis high.
Energy a hot sector
By late August, around $32 billion of capital had been raised for dedicated natural resources funds, according to Preqin, already above the prior peak of $30 billion hit in 2013. Neenan et al. argue these numbers actually understate the true investment capacity in the sector, as some of the biggest alt sector buyout funds invest in energy deals together their natural resources funds or by themselves. The industry has been under serious pressure, but it looks like asset managers are hunting for bargains in the sector.
Leverage continues to move up
The Fitch report also highlights that leverage, as defined by debt divided by FEBITDA, averaged 2.97X as of Sept. 30, 2015 on a trailing 12-month basis for the seven firms, up from 2.66X at year end 2014. Public market issuance totaled about $1.5 billion through October 2015, as issuers continued to lock in long-duration funding at very low rates and made plans to fund acquisitions.
Neenan and team project that leverage levels will decrease modestly in 2016 given expected FEBITDA growth. They note: “The 2016 outlook for the AIM industry is stable, as issuer fundamentals are expected to remain strong given the locked-in nature of the fee streams and continued growth in FAUM. Incentive income generation has been strong, but the favorable exit environment is not expected to remain indefinitely, particularly given the uncertain impact of a much anticipated change in interest rates.”