It's a billion-dollar industry, but few individual investors are invited to invest in their funds. Alternative asset managers including Blackstoneand Oaktree Capital Group manage billions of dollars of wealth on behalf of investors, clipping outsize management fees and incentive fees along the way.
In this segment from Industry Focus: Financials, join The Motley Fool's Gaby Lapera and Jordan Wathen for a brief discussion of how the industry works, and what the word "alternative" means when it comes to investing.
A full transcript follows the video.
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This video was recorded on April 24, 2017.
Gaby Lapera:If you're already lost, that's totally OK. We're going to do our best to explain everything, or at least something. Today's question is actually based on some feedback that we got from a listener at the University of Chicago. I forgot to ask his permission to use his name, so we won't, but thank you so much for the great questions. Good luck with your junior year. That's always a long, hard slog.
This is what the listener had to say: "I wanted to hear your thoughts on investing in alternative asset management firms, i.e. Oaktree, KKR, Blackstone. Many have claimed that these firms are trading at a discount for a number of reasons. Theirbusiness models and financial statements are egregiously difficult understand,frustrating many retail and institutional investors. There's a drasticvariability in yearly results. Andprofitability is highly dependent on assets under management." My answer to you is yes, yes, yes, and yes. We'llbacktrack first. Alternative asset managers areconfusing, so let's start at the beginning. What is analternative asset manager? Jordan, to you.
Jordan Wathen:Toput it very simply, analternative asset manager is anasset manager thatmanages alternative assets.I guess the more important thing is,what is an alternative asset?The best description is that an alternative asset issomething that the average Joe isn't likely to own aspart of their portfolio. Think things like private equity or venture capital or distressed debt,for example.
Lapera:Italso includes stuff likereal estate, if it's not just your house, orcertain collectible stuff likeartwork, butthat tends to be very exotic.
Wathen:Right,I shouldn't forget aboutartwork. I guess, when you think about alternative assets, there's really two things that sets them apart. Thefirst thing is that they're illiquid: They take time to buy and sell. Thestrategies that these managers usetake time to generate returns. For example,Blackstone might by a private company forone of its funds and then hold that company for seven or 10 yearsbefore it sells that company and distributes the profits to its investors. Adistressed debt fund might buy debtwith the goal of taking control of a company in bankruptcy, which is a long slog, a nasty process, and it takes time togenerate returns that way, too. So, these fundstypically have a lock-up periodin which investors can't access their money for five or even 10 years. Andactually, there's been some effortby the Blackstones of the world toextend this lock up period for as long as 15 or 20 years.