Fitch: Growing Dry Powder Weighs on U.S. Alternative Investment Managers
U.S. Alternative investment managers (IMs) continue to operate with
elevated levels of uncalled investment capital, or dry powder, at a time
when credit markets remain competitive and valuations are high,
according to a special report on the alternative IM industry published
today by Fitch Ratings.
"With more capital chasing fewer deals, significant fund
underperformance is possible if competition drives prices up further,"
said Meghan Neenan, Senior Director, Financial Institution at Fitch
Ratings. "Outsized vintage concentrations and a lack of distressed
investing opportunities, a traditional area of investment for
alternative IMs, could potentially exacerbate this issue."
Dry powder for the firms in Fitch's review totaled $254.4 billion as of
Sept. 30, 2015, representing a 35.2% increase from a year earlier.
That said, income from exits has doubled for the top six IMs over the
last three years. Alternative IMs are continuing to take advantage of
market valuations by exiting investments for strong returns. Gross
realized incentive income amounted to nearly $8 billion for the top six
firms in the rated universe for the 12 months ended Sept. 30, 2015. This
compares to $4 billion of gross realized incentive income earned in 2012.
Additionally, dislocations in the commodity markets, given declines in
crude oil prices, are expected to provide investment opportunities for
alternative IMs, which have long-term capital in place to capitalize on
market cycles. As of Aug. 26, 2015, approximately $32 billion of capital
had been raised for dedicated natural resources funds in 2015, according
to Preqin, which is already higher than the prior peak of $30 billion,
reached in 2013. Fitch believes these numbers understate the true
investment capacity in the sector, as many of the largest alternative
IMs' buyout funds invest in energy deals alongside their natural
resources funds or on their own. Fitch is mindful of the risk of
over-extending into energy and natural resources investments at the
wrong time, as there is continued uncertainty around how long downward
pressures will remain on certain commodity prices.
Fitch affirmed the ratings for all seven rated alternative IMs on Nov.
5, 2015, reflecting strong management teams and franchises, globally
diverse product platforms, relatively stable core operating fundamentals
due to the locked-in nature of a large portion of fee revenue; continued
growth in fee-earning assets under management (AUM); modest but
moderately increasing leverage levels; manageable near term obligations
relative to available liquidity resources; and increasing diversity of
Still, Fitch did revise the Rating Outlook for The Carlyle Group L.P. to
Negative from Stable due to a lack of progress on core fee-related
earnings before interest, taxes, depreciation, and amortization growth,
given a continuation of high fundraising costs, elevated 'catch-up'
management fees, and hedge fund redemptions, which have prevented the
firm from reducing its elevated leverage ratio.
The full report, 'U.S. Alternative Investment Managers: An Industry
Update', is available at www.fitchratings.com.
Additional information is available at www.fitchratings.com.
U.S. Alternative Investment Managers: An Industry Update
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