Alternative Asset Management – What’s Driving Activity, Growth And Consolidation?

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Leading investment bank DC Advisory published a Q&A with its GP Strategic Advisory US Co-leads, Hal Ritch and Donato de Donato, discussing the strategic opportunities available to alternative asset managers and how this market is being accessed by GPs to achieve a wide variety of objectives.

Hal and Donato reflect on the key trends impacting the alternative asset management industry, including the current macroeconomic environment on the GP Stake Sale and Financing market, and the factors driving consolidation.

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Key Trends Impacting Alternative Asset Management

Which Trends/ Dynamics Are Impacting The Alternative Asset Management Industry?

  • We believe the widespread use of certain financial ‘technology’ is transforming, and together with its knock-on competitive effects, will continue to transform, the alternative asset management industry. This financial ‘technology’ informs a range of strategic opportunities available to alternative asset managers, including, but not limited to:
    • Mergers and acquisitions
    • GP stake sales and non-dilutive management company-level financings (collectively, GP Stake Sales and Financings)
    • Fund-level financings (to be discussed at greater length in future pieces)
  • These transactions are altering the way firms fund GP commitments, fuel growth, transfer ownership, plan for succession, and compete for and retain talent, among many other things.
  • We expect the current macro environment and its impact on fundraising and deal activity to drive continued growth in GP Stake Sales and Financings, as well as strategic business combinations.

How Does The Current Macroeconomic Environment Impact The GP Stake Sale And Financing Market?

  • The current macroeconomic environment is a potential catalyst for increased activity. In this volatile market, GPs are using these financings for both defensive and offensive purposes.
    • On the defensive side, GPs are raising capital to fund future GP commitments to offset potential liquidity constraints arising from delayed exits and carried interest distributions. Others are aligning themselves with strategic partners that can provide fundraising support during an increasingly challenging fundraising environment. While the strategic rationale for acquisitions varies by situation, a common theme has been that buyers are attempting to grow their AUM by expanding their product offerings and / or geographic reach.
    • From an offensive perspective, some GPs are raising growth capital to make opportunistic hires and / or seed new strategies to capitalize on market dislocation. In many cases, GPs are also employing these financings to increase their GP commitment percentages to appeal to the LP community in a more complex and challenging fundraising environment.

Which Factors Are Driving Consolidation In The Alternative Asset Management Industry?

  • The challenging fundraising environment is likely one of the biggest contributing factors to GP consolidation.
  • Tight fundraising markets tend to favor large GPs, providing them with attractive opportunities to acquire smaller, more specialized managers that can then be integrated into their platforms.
  • Insurance companies have also been active buyers of alternative asset managers, as they have used M&A to build out in-house investment capabilities.
  • From the perspective of a seller, alignment with a large strategic partner can help drive AUM growth while alleviating the pressures and difficulties associated with fundraising.