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

November 30, 20214 min read
Investing in alternative asset managers: Another way to tap into the growth of private markets
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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 8: Private markets performance by category

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.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

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," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

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, excluding our Short Term Notes program, 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 July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

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