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1) I am long alternative asset managers $BX $APO $KRR. The growth of these firms has been fueled by low global interest rates as pension funds have been forced to dip into private markets to meet ~7% return thresholds.
2) I believe that these businesses will continue to compound AUM at a higher rate than the broader market grows. The returns of these 3 companies (which trade at reasonable multiples) should converge to AUM growth over the long-term.
3) ...Assuming a ~15% long-term CAGR on AUM growth over the next 20 years is by no means unreasonable when you think about the scale of private markets / alternatives relative to what the public markets currently hold. Steve Schwarzman put it best on $BX earnings call the...
4) ...other day. "We are in the early stages of an inexorable shift of capital flows toward alternatives...there is an estimated $6.5 trillion of private markets AUM today compared to nearly $250 trillion of public equity and debt markets globally."
5) While these firms appear massive, they are tiny compared to their addressable market, which is realistically any investor capital out there. $BX in particular has gone from a one-trick pony PE firm to a one-stop shop for any LP looking to invest in practically anything.
6) $BX is innovative, and creates new business lines in what feels like overnight. The firm is looking to be at $1Tn AUM by 2026 - they should easily crush this goal.
7) My favorite part about these businesses: they require almost zero capital (relative to other businesses) to grow earnings. A traditional business needs to invest shareholder capital or tap credit markets to grow earnings (e.g., build a new factory, buy a new plant, etc.).
8) For $BX to go out and raise its earnings, it's a matter of Jon Gray calling up an LP and asking for another $250MM (I realize it's a bit more complex than this, but for the sake of simplicity I say this). That extra cash is a straight drop-through to the bottom-line...
9) ...which almost reminds me of the explosive growth of SaaS businesses (which, like alternative managers, require almost zero capital to add another customer). Of course, you can spend money on sales teams, as $BX would spend money on a new partner...
10) ...however, in the end of the day, offering more of its product (i.e., adding dollars to its funds) costs $0 much in the way that someone signing up for $CRM costs the business $0. Most companies cannot say that.
11) Finally, these firms $BX $APO $KKR often offer incredible buying opportunities. Investors pummel these names during crises because of the perception of levered holdings. In reality, the fees go nowhere, and lockup on capital is a competitive advantage in a crisis.
12) A final thought (I saw this tweet the other day but cannot find and give credit). "Why buy meals at the restaurant if you can just own the restaurant?" I think the same way about these firms - the public stock itself is almost better than the investment funds.
13) These companies are growth companies and should be treated as such. Currently, they trade at market multiples, but their growth will crush the market over the next 20 years.
