CONTRIBUTORS
Matt Quinlan
Portfolio Manager, Research Analyst
Franklin Equity Group
United States
Dan Nuckles, CFA
Research Analyst
Franklin Equity Group
United States
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Introduction
In recent years, private asset management, a growing subsector within the broader financials sector, has emerged and is providing an opportunity for strategies focused on seeking capital appreciation with the potential for reliable and attractive dividends. Within this group, private asset managers have diverse focuses and strategies that are benefiting from strong inflows of capital, the development of new and tailored investment vehicles, and entry into adjacent markets. As a result, the group is seeing excellent opportunities to expand their assets under management (AUM) and diversify their mix of business to potentially drive capital appreciation for their investors. This growth, along with the long-term capital they typically raise, can drive an increasing amount of fee-related earnings, which strengthens their business and supports their ability to pay an attractive dividend stream to shareholders. This combination of growth and income makes the group a strongly attractive sector for investment for income-oriented equity strategies, in our view.
Expanding investor base
Retail investors have historically invested in the asset management industry through mutual fund companies. An increasing awareness and ability to invest in public companies through these products, along with an aging population saving for retirement, have fueled investor interest in asset managers over many decades. Over time, new types of investment companies and products were created to meet expanding needs. Despite more investment options, retail investors were largely limited to investments in public securities through such traditional vehicles as mutual funds and annuities, and later exchange-traded funds (ETFs). At the same time, institutional investors with large pools of capital, such as pension plans, sovereign wealth plans, and endowments, have had a wider range of investment options at their disposal, through both public and private securities. Private asset managers catered their products to these institutions by offering specific fund strategies, goals and potential outcomes that could diversify and enhance an institution’s investment portfolio and help meet the varying needs of its constituents. Institutions have long been able to invest in areas such as venture capital and leveraged buyouts, and their investment results have driven a surge in the number of private asset managers and their AUM.
With few exceptions, access to private asset managers has historically been limited for retail investors. This changed as several private asset managers became publicly traded companies and new investment vehicles, which cater specifically to retail investors, were developed. We believe the competitive positioning and strategies of several of these private asset managers create compelling opportunities for investors to potentially benefit from both capital appreciation and income.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
An investment strategy focused primarily on privately held assets presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies. Additionally, an investment in private assets or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.
Real estate investment trusts (REITs) are closely linked to the performance of the real estate markets. REITs are subject to illiquidity, credit and interest rate risks, and risks associated with small- and mid-cap investments.