Investing in alternative asset managers: Another way to tap into the growth of private markets

Individual investors have historically missed out on certain alternative investments as institutions gobbled up the lucrative and exclusive opportunities private market managers offered them. Today, however, it’s not only possible for individuals to invest in  private markets on platforms such as Yieldstreet – but now they can also invest in some of Wall Street’s best known asset managers. Instead of getting returns on the assets in a strategy managed by a firm like Blackstone, investors share in Blackstone’s overall success by investing in the firm itself. Investing in asset managers themselves presents another investment opportunity for those individuals seeking to diversify their holdings, generate cash flow and growth. Instead of getting returns on the assets in a strategy, investors share in the business’s success.

How to gain become a private equity exposure

It was rare even a decade ago for private alternative asset managers to offer outsiders ownership stakes in their firms. Today, however, the growing size and age of some firms have led them to explore new ways to raise cash for running their businesses or cash out some of their equity ownership by selling stakes in their firm to outside investors. In private markets, the group of owners of the asset management firms are referred to as general partnerships or “GPs” while the investors in their underlying funds and strategies are known as limited partners or “LPs.” The ownership stakes in an asset management firm are offered as “GP stakes” and can be made directly or through a fund. Blackstone, for example, recently raised $5.5 billion in a GP stakes fund, exceeding its target by 37 percent.

The ownership shares offered in a private alternatives manager are not usually the same as those held by the company’s management team. They are typically minority, non-voting shares with no management authority over the business, investment approach, or funds. What ownership stakes do provide, however, is access to the regular recurring revenue stream that private managers earn through management fees. Private managers typically charge their investors a 2% management fee on their total amount of invested assets. A $1 billion fund that charges a 2% management fee, for example, generates $20 million annually in fee revenue. Fees are steady, predictable income and not directly tied to the ups and downs of market performance. Managers may have different clauses for adjusting fees based on their performance, but private markets fees are mostly fixed.

Private managers also earn what is known as carried interest, which are the profits generated by the underlying investments in their funds. These profits are distributed to the investors and the firm’s ownership.

How does it work?

Like most private investments, ownership stakes in management firms are illiquid and tied up for terms that can last ten years or so. The investor trades liquidity in exchange for regular cash flow from management fees, in addition to the potential growth of their ownership stake as the business expands and as carried interest accumulates. 

One of the key potential benefits of investing in management stakes is choosing which managers to invest in. Like any industry, performance can vary greatly. The chart below shows the average performance of top-performing, median and bottom-performing managers across several private markets categories. 

Exhibit 1: Private markets performance by category

Chart, waterfall chart

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Source: McKinsey, chart shows Global fund median IRR and percentile spreads by asset type, net IRR to date through Sept 30, 2020, for vintage 2007-17 funds, %.

Investing in built-to-last managers

For the better part of two decades, investors have scoured the market for alternative sources of yield, income and return. With bond yields pegged near historical lows, stock indices at historical highs and inflation eating away at savings, many investors are seeking novel ways to diversify a portfolio without taking on too much risk. In recent years, institutions have poured record amounts of cash into private markets, and the returns haven’t disappointed. Private equity has outperformed broad US stocks over the last 5,10, and 20-year periods. The long-term return on the Cambridge Associates Private Equity Index, for example, is 13.8% versus 9.1% for the S&P 500 index. [2]

By owning a slice of an alternative private manager via an equity stake, an investor can earn long-term potential return growth while collecting regular cash payments from the management fees that firms earn. Individual investors now have this opportunity to further diversify their own alternatives portfolios and revenue potential through owning stakes in private markets managers.

If this investment approach has you curious, be sure to register for our upcoming webinar and consider whether the GP stakes opportunity on Yieldstreet makes sense with your portfolio.

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1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest" or "Annualized Return" represents an annual target rate of interest or annualized target return and "term" represents the estimated term of the investment. Such target interest or target returns and estimated term are projections of the interest or returns and or term and may ultimately not be achieved. Actual interest or returns and term may be materially different from such projections. This targeted interest or returns and estimated term are based on the underlying investments held by the applicable.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including Dec 22th, 2021, after deduction of management fees and all other expenses charged to investments.

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