Alternative Asset Management Industry 1 Convergence Insights Twelve Months Ended March 31, 2017

Size: px

Start display at page:

Download "Alternative Asset Management Industry 1 Convergence Insights Twelve Months Ended March 31, 2017"

Ann Beasley
6 years ago
Views:

1 Alternative Asset Management Industry 1 Twelve Months Ended March 31, 2017 The Industry Continued to Grow during the Twelve Months Ended March 31, 2017! KEY CONVERGENCE GROWTH INDICATORS ALL ALTS MANAGERS MANAGERS >50% Alt Assets Change Change # REGULATORY ACTIONS 4,685 4, % % # ALTERNATIVE MANAGERS 6,446 6, % 5,071 5, % # ALTERNATIVE ADVISORS 7,494 7, % 5,901 6, % # ALTERNATIVE FUNDS 44,534 46, % 33,910 35, % # ALTERNATIVE HEADCOUNT 464, , % 93,388 98, % $ ALTERNATIVE ASSETS-Trillions $11.97 $ % $9.89 $ % OPERATING PRODUCTIVITY NA NA NA % Convergence s Q analysis of the Industry provides original insights into market factors impacting the Industry. We measure the health of the Industry by analyzing changes we observe across 17,500+ Advisors, 53,000+ Private Funds and 6,000+ Service Providers. Industry assets grew 6.9% higher than the 5.3% asset growth observed at purer-play Managers (defined as Managers advising greater than 50% of private fund assets/total fund assets). The number of new Managers and Advisers entering the Industry increased 3.8% and 3.9%, respectively, versus 4.8% and 4.7%, at pure play Managers and Advisers, respectively. The number of Private Funds in the Industry increased 4.2% and by 5.4% at pure-play Managers. Headcount across the Industry declined slightly while Headcount at more pure play alternative Advisers increased 5%. Please refer to supporting schedules for detailed industry insights by type of Fund. Please go to for information on Convergence or call John Phinney, George Evans or George The Alternative Asset Management Industry is defined as all RIAs advising one or more Private Funds. Private Funds include Hedge, Private Equity, Real Estate, Venture Capital, Structured Asset, Liquidity and Other Funds 1 P age

Private Fund Growth-3 Years The number of alternatives funds grew at a 10% CAGR over the past three years led by Venture Capital, Real Estate and Private Equity funds which grew at a CAGR of 18.

2 Private Fund Growth-3 Years The number of alternatives funds grew at a 10% CAGR over the past three years led by Venture Capital, Real Estate and Private Equity funds which grew at a CAGR of 18.3%, 15.5% and 12.5%, respectively. The CAGR for Securitized Asset Funds, Other Funds and Hedge Funds grew 12.2%, 7.8% and 3.5%, respectively. Year-over-year growth rates declined for three consecutive years in Private Equity, Real Estate and Securitized Assets funds. These declines are not unusual given the life-cycle of closed-end funds. Managers of these funds typically launch new funds as they begin winding-down previously launched funds. New follow-on funds, on average, begin being launched 4-6 years after the initial fund is launched. While the number of Hedge Funds added in 2016 recovered from their 2015 lows, they remained well below their 2015 peak year of 936 adds. Hedge Funds, as a percentage of the alternative fund market, declined 5.8 points from 35% in 2014 to 29% in 2017, a decline of 16.7%. Private Equity, Venture Capital and Real Estate Funds experienced market share increases of 2%, 3% and 1%, respectively. Table 1: Change in the Number of Alternative Funds # Change HF PE VC RE OTHER SAF LF Total ,168 11,193 4,157 2,402 3,660 1, , , (9) 4, ,896 1, (2) 4, ,382 % Change HF PE VC RE OTHER SAF LF Total % 100% 100% 100% 100% 100% 100% 100% % 17.7% 17.5% 21.1% 14.1% 24.1% -10.1% 14.2% % 14.4% 29.4% 14.9% 2.1% 6.7% -2.5% 10.0% % 5.8% 8.9% 10.7% 7.6% 6.5% 9.0% 5.8% CAGR 3.5% 12.5% 18.3% 15.5% 7.8% 12.2% -1.5% 10.0% % of Market HF PE VC RE OTHER SAF LF Total % 32% 12% 7% 10% 4% 0% 100% % 33% 12% 7% 10% 4% 0% 100% % 34% 14% 8% 10% 4% 0% 100% % 34% 15% 8% 10% 4% 0% 100% Change -5.8% 2.3% 2.9% 1.1% -0.6% 0.2% -0.1% 0.0% Change % -16.7% 7.1% 24.4% 15.8% -5.7% 6.1% -28.2% 0.0% 40% 30% 20% 10% 0% Market Share of Funds by Fund Types 35% 32% 34% 29% 15% 12% 10% 7% 8% 10% 4% 4% 0% 0% HF PE VC RE OTHER SAF LF P age

3 Private Fund Asset Growth-3 Years The value of alternatives fund assets grew at an 8.8% CAGR over the past three years led by Venture Capital, Real Estate and Other Funds which increased at a CAGR of 12.4%, 12.1% and 11.7%, respectively. The CAGR for Securitized Assets, Private Equity, and Hedge Funds grew 9.5%, 9.3% and 8.0%, respectively. Year-over-year asset growth rates declined for three consecutive years in Venture Capital Funds The value in Hedge Funds recovered from their 2016 low and their share of the overall private asset market declined from 52.7% in 2014 to 51.5% in 2017, a decline of 1.2 percentage points or 2% decline from All other fund types experienced modest market share gains. Table 2: Change in the Value of Private Fund Assets $ Change in Assets HF PE VC RE SAF LF OTH Total 2014 Baseline $5.213 $2.290 $0.366 $0.400 $0.404 $0.333 $0.890 $ $0.918 $0.434 $0.074 $0.037 $0.049 $0.029 $0.209 $ $0.004 $0.119 $0.060 $0.054 $ $ $0.027 $ $0.432 $0.143 $0.020 $0.072 $ $0.009 $0.170 $0.870 % Change in Assets HF PE VC RE SAF LF OTH Total % 100% 100% 100% 100% 100% 100% 100% % 19.0% 20.3% 9.3% 12.2% 8.8% 23.5% 17.7% % 4.4% 13.7% 12.4% 7.9% -6.9% -2.5% 1.8% % 5.0% 3.9% 14.7% 8.6% -2.7% 15.8% 7.3% CAGR 8.0% 9.3% 12.4% 12.1% 9.5% -0.5% 11.7% 8.8% % of Industry Assets HF PE VC RE SAF LF OTH Total % 23.1% 3.7% 4.0% 4.1% 3.4% 9.0% 100.0% % 23.4% 3.8% 3.8% 3.9% 3.1% 9.4% 100.0% % 24.0% 4.2% 4.1% 4.1% 2.8% 9.0% 100.0% % 23.5% 4.1% 4.4% 4.2% 2.6% 9.7% 100.0% Change in Market Share -1.1% 0.3% 0.4% 0.4% 0.1% -0.8% 0.8% 0.0% % Change in Market Share -2.2% 1.4% 10.5% 9.5% 2.2% -23.5% 8.4% 0.0% Market Share of Assets by Fund Type 60.0% 50.0% 52.7% 51.5% 40.0% 30.0% 20.0% 10.0% 0.0% 23.1% 23.5% 9.0% 9.7% 3.7% 4.1% 4.0% 4.4% 4.1% 4.2% 3.4% 2.6% HF PE VC RE SAF LF OTH P age

Private Fund Adds and Drops-3 Years For the period ended 3/31/2017, net Hedge Funds added rebounded from their 2015 lows adding 326 funds, up from 49 in 201, Securitized Asset Funds added 142 and

Despite media report of record Hedge Fund closures, fewer funds closed for the 12- month period ended 3/31/2017 than in the prior year.

Net Fund Adds 16-17 Net Fund Adds 15-16 Net Fund Adds 14-15 Funds Added 16-17 Funds Added 15-16 Funds Added 14-15 Funds Closed 16-17 Funds Closed 15-16 Funds Closed 14-15 Hedge Fund Activity 327 49

4 Private Fund Adds and Drops-3 Years For the period ended 3/31/2017, net Hedge Funds added rebounded from their 2015 lows adding 326 funds, up from 49 in 201, Securitized Asset Funds added 142 and Other Funds added 424. Venture Capital, Private Equity and Real Estate funds all experienced year-over-year declines. Despite media report of record Hedge Fund closures, fewer funds closed for the 12- month period ended 3/31/2017 than in the prior year. Net New Funds, defined as New Funds Less Closed Funds increased for Hedge Funds while declining across all other Fund Types. Net Fund Adds Net Fund Adds Net Fund Adds Funds Added Funds Added Funds Added Funds Closed Funds Closed Funds Closed Hedge Fund Activity ,314 1,641 2,207 2,615 2,158 2, ,000 1,500 2,000 2,500 3,000 Private Equity Fund Activity Net Fund Adds Net Fund Adds Net Fund Adds Funds Added Funds Added Funds Added Funds Closed Funds Closed Funds Closed ,896 1,985 1,591 1,704 2,759 3, ,000 2,000 3,000 4,000 Venture Capital Fund Activity Net Fund Adds Net Fund Adds Net Fund Adds Funds Added Funds Added Funds Added Funds Closed Funds Closed Funds Closed ,172 1,435 1, ,000 1,500 2,000 Net Fund Adds Net Fund Adds Net Fund Adds Funds Added Funds Added Funds Added Funds Closed Funds Closed Funds Closed Real Estate Fund Activity ,000 Net Fund Adds Net Fund Adds Net Fund Adds Funds Added Funds Added Funds Added Funds Closed Funds Closed Funds Closed Securitized Fund Activity Net Fund Adds Net Fund Adds Net Fund Adds Funds Added Funds Added Funds Added Funds Closed Funds Closed Funds Closed Other Fund Activity , ,000 1,200 4 P age

5 Private Fund Asset Adds and Drops-3 Years For the period ended 3/31/2017, Hedge Fund assets rebounded from their 2015 lows, increasing $432bn, up from flat in Over the past 3-years, Hedge Fund Assets increased $1.35 trillion, representing a 26% increase over 3/31/2014. The increase in Hedge Fund Assets represented roughly 48% of the change in Industry Assets. Private Equity Fund Assets increased 30% over 3/31/2014 and represent 25% of the change in Industry Assets. All other Fund Types increased materially but have an immaterial share. Despite the slow-down in new Hedge Funds being launched, capital is continuing to flow into existing Hedge Funds. Table 3: Break-Down of Changes in Alternative Asset Values Private Assets HF PE VC RE OTHER SAF LF Total Funds Closed $ $ $ $ $ $ $ $0.884 Funds Closed $ $ $ $ $ $ $ $0.682 Funds Closed $ $ $ $ $ $ $ $0.296 Funds Added $0.530 $0.785 $0.050 $0.092 $0.205 $0.029 $0.222 $1.912 Funds Added $0.376 $0.311 $0.043 $0.078 $0.124 $0.001 $0.140 $1.074 Funds Added $0.388 $0.218 $0.032 $0.050 $0.080 $0.012 $0.130 $0.910 Fund Gains(Losses) $ $0.042 $ $ $0.075 $0.028 $0.104 $0.722 Fund Gains(Losses) $ $0.134 $ $ $0.048 $ $ $0.179 Fund Gains(Losses) $ $ $0.007 $ $0.023 $0.001 $0.091 $0.256 Net Asset Adds $0.918 $0.434 $0.074 $0.037 $0.049 $0.029 $0.209 $1.751 Net Asset Adds $0.004 $0.119 $0.060 $0.054 $ $ $0.027 $0.213 Net Asset Adds $0.432 $0.143 $0.020 $0.072 $ $0.009 $0.170 $0.870 Net Change in Assets $1.35 $0.70 $0.15 $0.16 $0.13 -$0.01 $0.35 $2.83 % of Total Change 48% 25% 5% 6% 4% 0% 12% 100% % Increase-3/31/ % 30% 42% 41% 31% -2% 39% 29% 5 P age

6 Fund and Asset Changes-3 Years Over the 3-year period ending 3/31/2017 the alternative asset management industry experienced strong growth. The number of private funds increased by 11,519, or 33% driven by double digit growth across all fund types and the value of private fund assets increased $2.8trillion, or 29% driven by new fund launches, subscriptions into exiting funds and leverage. Table 4: Change in Private Funds # Private Funds HF PE VC RE OTHER SAF LF Total 3/31/ ,168 11,193 4,157 2,402 3,660 1, ,895 3/31/ ,479 15,950 6,880 3,701 4,589 1, ,414 Change 1,311 4,757 2,723 1, ,519 Change % 11% 42% 66% 54% 25% 41% -4% 33% A more detailed look at the data shows that the number of Hedge Funds launched since 3/31/2014 grew 11% yet trails all other fund types, other than Liquidity Funds. While 5,510, or 45%, of all Hedge Funds in existence at 3/3/2014 closed, 6,821 were added, representing a 56% increase. Table 5: Breakdown of Changes in Private Funds # Private Funds HF PE VC RE OTHER SAF LF Total New Funds 6,821 8,145 3,840 2,092 2,468 1, ,563 Fund Closures (5,510) (3,388) (1,117) (793) (1,539) (667) (30) (13,044) Net Change 1,311 4,757 2,723 1, (4) 11,519 % Fund Added 56% 73% 92% 87% 67% 96% 29% 70% % Fund Closures -45% -30% -27% -33% -42% -54% -34% -37% Net Change % 11% 42% 66% 54% 25% 41% -4% 33% Hedge Funds assets grew $1.35trillion, or 26%, the largest increase yet the smallest percentage change among all Fund Types: Table 6: Change in Private Fund Assets Private Assets (Trillions) HF PE VC RE SAF LF OTH Total 3/31/2014 $5.21 $2.29 $0.37 $0.40 $0.40 $0.33 $0.89 $9.90 3/31/2017 $6.56 $2.99 $0.52 $0.56 $0.53 $0.33 $1.24 $12.73 Increase (Decrease) $1.35 $0.70 $0.15 $0.16 $0.13 -$0.01 $0.35 $2.83 Change % 26% 30% 42% 41% 31% -2% 39% 29% Hedge Funds took 48% of $2.83trillion in new fund asset growth driven by $920bn in growth in exiting funds. Hedge Funds took in 33% of new fund assets coming into the industry compared to Private Equity at 34%. Table 7: Change in Alternative Assets Private Assets (Trillions) HF PE VC RE SAF LF OTH Total New Fund Assets $1.29 $1.31 $0.13 $0.22 $0.41 $0.04 $0.49 $3.90 Dropped Fund Assets -$0.87 -$0.42 -$0.01 -$0.06 -$0.14 -$0.08 -$0.29 -$1.86 Fund Inflation (Deflation) $0.92 -$0.19 $0.04 $0.00 -$0.15 $0.03 $0.15 $0.80 Net Change in Assets $1.35 $0.70 $0.15 $0.16 $0.13 -$0.01 $0.35 $2.83 Net Change in Assets % 48% 25% 5% 6% 4% 0% 12% 100% New Fund Assets % 33% 34% 3% 6% 10% 1% 13% 100% 6 P age

Top 100 Alternative Managers Asset & Fund Growth-1 Year The charts below show that capital flowing into the Top 100 alternative funds continues to grow faster than the overall

Their Assets grew 11% versus 6.9% for the overall alternatives market.

the market grew 4.6%. This represents 19% of all Private Funds in the market.

8% over 2016 (see page 1). Alternative asset management continues to remain a crowded market.

7 Top 100 Alternative Managers Asset & Fund Growth-1 Year The charts below show that capital flowing into the Top 100 alternative funds continues to grow faster than the overall market. At the end of Q the Top 100 Alternative Asset Managers advised $5.84 trillion or 46% of total alternative assets, up from 44% in Q Their Assets grew 11% versus 6.9% for the overall alternatives market. Similarly, the Top 100 Managers increased their share of alternative funds increasing the number of funds they advise by 10% to 8,823 while the overall number of private funds in the market grew 4.6%. This represents 19% of all Private Funds in the market. While assets and funds continue to flow to the largest Managers, new Managers with greater than 50% Alts Assets continue to enter the market with an increase of 4.8% over 2016 (see page 1). Alternative asset management continues to remain a crowded market. With more Managers chasing alpha, trades are becoming more crowded and the infrastructure more expensive, which reduces alpha for fund investors. Top 100 Managers by Funds 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,354 46,414 19% 8,036 18% 8,823 Q1 16 Q1 17 Funds All Funds Change 19% 19% 19% 19% 18% 18% 18% 18% 18% Top 100 Managers by Assets % % Q1 16 Q1 17 Alt Assets All Assets % 46% 46% 45% 45% 44% 44% 43% 7 P age

8 Non-Investment Headcount-1 Year Managers with greater than 50% of their advised assets in alternatives increased non-investment staff by 4.5%. Non-Investment staff in Hedge Funds showed a slight decline despite a 4% increase in the number of new Hedge Fund Advisers. This suggests that existing Hedge Fund Advisers may be reducing non-investment staff to offset lower management fees and investor pressure on fund expenses. Other Funds, Real Estate and PE Funds all showed double digit increases in non-investment staff driven by the number of new Advisers entering these segments, which we estimate accounts for roughly 50% of this headcount growth while the remaining 50% is driven by business complexity, increased regulatory pressures, greater investor servicing demands and additional transparency into their business models. Headcount Growth by Fund Type 60,000 50,000 40,000 30,000 20,000 10, % 18.7% 10.1% -0.1% 4.5% -2.0% -41.0% HF PE RE VC SAF OTHER Total Q116 Q117 Change 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% 8 P age

Complexity/Risk Profiles -1 Year Convergence created a proprietary methodology to assign complexity/risk profiles to all alterative managers in our database based on an unweighted 40 factor model.

Many of these factors are part of Convergence s growing library of original content, and are proprietary and not available from other public and private sources.

4% suggesting that these Managers may incur additional costs or need additional third party services to help them implement the control environment needed to avoid incurring significant levels of

9 Complexity/Risk Profiles -1 Year Convergence created a proprietary methodology to assign complexity/risk profiles to all alterative managers in our database based on an unweighted 40 factor model. Our clients use this data to track changes to a Manager s business model and evaluate the impact that these changes may have on performance returns, operating risks and fund expenses. Many of these factors are part of Convergence s growing library of original content, and are proprietary and not available from other public and private sources. At the end of Q1 2017, the number of Managers with a HIGH Complexity Profile increased by 2.4% suggesting that these Managers may incur additional costs or need additional third party services to help them implement the control environment needed to avoid incurring significant levels of operating risk. Clients and Service providers should examine the relationship between higher complexity levels and lower headcount to determine whether Advisers are reducing headcount to offset fee pressures which may increase operating risks. Industry Complexity Profile 3,500 3,158 3, % 3, % 5.0% 2, % 2,000 1, % 1,329 1, % 1,805 1, % 1, % % 0 High Medium Low Q116 Q117 Change 0.0% High Complexity/Risk Profiles can create red flags in the eyes of institutional investors and used by regulators to target Managers for audit. We would expect Managers with Medium-High Complexity Profiles to use service providers who have demonstrated experience with Managers with similar complexity/risk profiles and look for ways to simplify that risk. Please contact Convergence to learn more about how you can use our Complexity/Risk Profiles to improve your business model. 9 P age

SEC Enforcement Actions-1 Year The number of SEC Enforcement Actions across the Industry increased 5%, led by an 8% increase in Regulatory Actions and a 4% increase in Civil Actions.

It should be noted by Managers with less than 50% of their assets in alternative assets experienced the same 5% year-over-year growth in Total Actions experienced yet experienced 8% growth in

10 SEC Enforcement Actions-1 Year The number of SEC Enforcement Actions across the Industry increased 5%, led by an 8% increase in Regulatory Actions and a 4% increase in Civil Actions. Criminal Actions declined by 4 driven by Managers that closed. It should be noted by Managers with less than 50% of their assets in alternative assets experienced the same 5% year-over-year growth in Total Actions experienced yet experienced 8% growth in Regulatory type actions versus only 6% for Managers advising greater than 50% in alternative assets. This difference suggests that Managers advising less than 50% in alternative assets may have less organizational expertise dealing with the regulatory issues created by alternatives. Regulatory Actions 6,000 5,000 4,000 3,000 2,000 1, % 4,930 4,685 5% 3,471 3,227 4% 1,316 1, % Civil Criminal Regulatory Total Q116 Q117 Change 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% The SEC announced significant changes to Form ADV that will go into effect in October Registered Advisors will need to submit more information on managed accounts as well as the types of asset classes, derivatives and in certain cases, the leverage used by Advisors. For a summary of these changes please go to: 10 P age

Unique Service Providers-1 Year The total number of service providers named in alternative funds increased despite industry consolidation taking place across Administrators and Prime Brokers.

The number of new Administrators continues to divert financial scale away from established Administrators and continues to pressure pricing and reinvent service models.

11 Unique Service Providers-1 Year The total number of service providers named in alternative funds increased despite industry consolidation taking place across Administrators and Prime Brokers. The number of Fund Administrators disclosed by Managers increased by 42, or 9%. New Administrators are being formed to service the more specialized needs of Private Equity and Real Estate Funds. The number of new Administrators continues to divert financial scale away from established Administrators and continues to pressure pricing and reinvent service models. The number of Fund Auditors remained flat to The number of prime Brokers declined by 15 or 6% from 2016 levels. Industry mergers have reduced the number of Prime Brokers and Advisers are consolidating relationships which reduces the number of unique Prime Brokers servicing the Industry. The number of Custodians increased by 14, or 1% driven by greater diversification across Managers who are adding new Custodians to service specific markets. The greatest change was observed in Marketers as 141 Marketers were added by Managers, or 9%. This is in part a function of marketing teams spinning out of more established firms and the addition of private funds to an increasing number of third party distribution platforms. Unique Service Providers % % 10% 8% 6% % 437-6% % % 2% 0% -2% -4% -6% 0 # Administrators # Auditors # Prime Brokers # Custodians # Marketers Q116 Q117 Change -8% 11 P age

Operating Efficiency-1 Year Operating Efficiency, defined as the number of staff supporting funds and assets at Managers who advise greater than 50% alternative assets, improved slight by.

The number of non-investment staff supporting funds and assets declined by 1.1% and 1%, respectively.

Investment staff per fund remained flat year-over-year while investment staff per billion of private assets increased by 6%. The increase is typically driven by new fund launch activity.

The decline in non-investment staff can also be attributed to the increase in Administrators providing services to Private Equity funds.

12 Operating Efficiency-1 Year Operating Efficiency, defined as the number of staff supporting funds and assets at Managers who advise greater than 50% alternative assets, improved slight by.4% and.3%, respectively. Negative period-to-period values means that fewer staff were needed to support funds and assets. The number of non-investment staff supporting funds and assets declined by 1.1% and 1%, respectively. The decline is driven by lower levels of hiring as compared and higher levels of funds and assets observed during the period. Investment staff per fund remained flat year-over-year while investment staff per billion of private assets increased by 6%. The increase is typically driven by new fund launch activity. When new funds are launched by new Advisors there are typically more investment staff hired than non-investment staff. The decline in non-investment staff can also be attributed to the increase in Administrators providing services to Private Equity funds. We suspect this trend will continue to reduce the number of non-investment staff needed to support these types of funds. Headcount per Fund % % -1.1% IP/FUND NIP/FUND FTE/FUND Q116 Q117 Change 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% -0.8% -1.0% -1.2% Headcount per Billion of Assets % % -1.0% IP/BN NIP/BN FTE/BN Q116 Q117 Change 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 12 P age

Alternative Asset Management Industry 1 Convergence Insights Twelve Months Ended December 31, 2015

Alternative Asset Management Industry 1 Twelve Months Ended December 31, 2015 Q4 2015 Industry Headline-Alternative Asset Management Firms Continue to Grow! - INDUSTRY ASSETS GROWTH OF 10% AND FUNDS GROWTH