Alternative asset managers such as KKR and Apollo Global Management are attracting the attention of investors looking to capitalize on a growing trend in the financial services industry of capital migrating from public to private markets. Traditionally, these strategies have faced strict barriers to entry, including high fees and lengthy lock-in periods where funds cannot be withdrawn. But the expansion of retail products has made private markets more attractive to investors looking for returns that can hedge against inflation and protect against any potential hits to equity or bond markets. A recent Bank of America survey of independent financial advisors found that nearly three-quarters of respondents wanted to increase allocations to private markets. About half of respondents said they recommended allocating 1% to 10% of assets to alternatives, while 16% did not. If alternative allocations rise to about 15% of advisers’ intermediary assets, the total addressable market would be about $5 trillion, according to a Goldman Sachs report this month. “This is really the first or second inning for this migration that’s happening,” Eric Clark, portfolio manager at Rational Dynamic Brands Fund (HSUTX), said last month. “So we’ve added over the past few days that It holds KKR, Apollo and Blackstone. “The Rational Dynamic Brands fund is a small institutional portfolio with $80 million in assets, a 1.24% expense ratio, and is highly concentrated, holding just 24 stocks, according to Morningstar. The idea is to give investors more exposure to potential bets, Clark said. Apollo is the fund’s second-largest holding, with a weight of more than 5%. “No one seems to be really paying attention to this area,” Clark added. “However, within our own industry, when you talk about it at an advisory level, we see it as a key driver of portfolio positions.” INVESTMENT CASE Alternative asset managers are having a banner year. A report from Goldman Sachs showed the group surged 51% in 2024, outperforming the broader market and other financial stocks. Blackstone is the largest alternative asset manager with a market capitalization of about $211 billion, and its stock price has risen more than 30% in the past year. KKR and Apollo are not included in the S&P 500 in 2024, but are each up more than 75%. Even after these gains, investors remain optimistic about the long-term prospects of alternative fund managers, citing strong profit growth forecasts. John Belton, portfolio manager at Gabelli Funds, the holding company for Gabelli Growth Fund ( GABGX ), likes KKR, holding 1.8% of assets in the stock as of November, according to Morningstar. Belton said KKR “is involved in a lot of areas and is likely to do well this year both in terms of returns and in terms of monetization.” “This is a very good management team. They have laid out a very compelling long-term revenue or (asset under management) revenue earnings growth path that we think will continue this year, and it’s trading at a price that we don’t think is particularly rich. Belton is particularly fond of the growing influence of private equity firms in the life insurance business, which began with Apollo’s acquisition of Athene a few years ago and continues to grow with KKR’s acquisition of Global Atlantic last year. With the added benefit of the company’s long-term liabilities, alternative asset managers have a source of capital outside of the traditional method of raising money from retirement funds. “It’s an interesting complementary business and I think it’s a good fit for these guys in the past,” Belton said. A private credit strategy built over a decade or so. However, in some quarters, the investment strategies used by alternative asset managers have also faced regulatory scrutiny and been criticized as being less liquid and riskier. Wall Street is trying to separate the wheat from the chaff at alternative asset managers Separately. Wolfe Research analyst Steven Chubak said this month that KKR and Ares Management are top picks, saying KKR’s profit expectations are rising, while Ares is improving its capital deployment, while Goldman Sachs said KKR and TPG are top picks, while others like Blackstone. Neutral. It recently downgraded Blue Owl Capital to neutral, saying Carlyle is cheap and undervalued. “These stocks are grossly underowned,” Rational’s Clark said. “They are underrepresented in the index at 0.5% or less. Yet they account for the lion’s share of asset flows in the wealth management pipeline.”
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