The Biggest Alternatives Firms Will Make More Money From Fees in 2021

Major alternative asset managers will rake in higher fees over the next couple of years as investors continue to flock to alternative investments, according to Morgan Stanley equity analysts.

In their preview of publicly-traded alternative asset managers’ first quarter earnings on Friday, the analysts predicted fundraising will drive 17 to 18 percent of average fee-related earnings growth in 2021 and 2022. In addition, they anticipated an increase in gross realized performance fees of 56 percent in 2021 and 33 percent in 2022.

According to the Morgan Stanley analysts, alternative investment firms are better positioned to benefit from the economy recovery compared to traditional asset managers, given the acceleration in mergers and acquisitions, initial public offerings, and SPACs, or special-purpose acquisition companies.

“The structural growth story of alts weathered the pandemic much better than feared, and now as the economy transitions into a growth stage, demand for alternatives remains intact driven by a low-rate backdrop and asset owners struggling to meet return targets that’s leading to an increasing willingness to trade liquidity for returns that could drive fundraising above our base case,” wrote analysts Michael Cyprys, Peter Kaloostian, and Ian Buchanan.

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Among alternative managers, they singled out Apollo and Carlyle Group as companies that they expected to report improved performance during the first quarter. At Apollo, the analysts predicted that private equity performance fees would return to higher levels following the resolution of financial difficulties experienced by portfolio companies in the first quarter of last year. Continued and consistent fundraising could also “dispel any lingering key man risk concerns” following the exit of former CEO and chairman Leon Black, according to the report.

Meanwhile, Morgan Stanley analysts attributed Carlyle’s strong outlook to higher performance fees coming from “robust” exit activity.

Across publicly-traded alternative managers, the analysts anticipated a 19 percent decrease in net performance fees compared to the fourth quarter, due to a handful of larger exits in the last months of 2020. Year-over-year however, the analysts said first-quarter performance fees would show a “sharp recovery with 100 percent growth given to the better backdrop.”