Amid an array of ongoing macroeconomic headwinds, the credit rating outlook for alternative investment managers remains neutral due to their still-strong operating performance and rosy growth prospects, Fitch Ratings says in a new report.
Following its latest review of the alt manager sector, Fitch said that its rating outlooks are stable — which reflects the firms’ consistent performance and the underlying resilience of their business models, driven by recurring management fees and locked-in capital.
Assets under management (AUM) were up by 18.5% on a year-over-year basis to June 30, it noted — as alt managers continued to generate “strong aggregate inflows” in the face of heightened market volatility, along with increased economic and policy uncertainty.
“Growth was primarily fuelled by strong inflows in private credit, infrastructure, and secondaries, along with several strategic acquisitions,” the rating agency said.
At the same time, the sector’s average margins rose to 49.8% for the 12-month period ended June 30, up from 48.7% for the same period a year ago.
Fitch expects margins to continue expanding, “due to scale, operating leverage, and performance-linked compensation,” but at a slower growth rate.
Indeed, looking ahead the sector’s “long-term growth prospects remain strong, especially across the private wealth and insurance channels,” it said.
A recent executive order in the U.S. calling for expanding access to alternative assets in retirement accounts also supports long-term growth.
However, growing exposure to retail investors will increase fee volatility and make those revenues less resilient in the face of tougher markets, it cautioned.
Currently, alt managers, “face a challenging macroeconomic backdrop due to slower than expected investment realizations, heightened market volatility and ongoing geopolitical and trade tensions,” the report said.
Fitch expects realizations to increase over the next 12-18 months, “as primary exit channels reopen and managers seek to return capital after extended holding periods.” Additionally, alt managers have significant unrealized gains in their funds, which also bolsters the prospect of stronger realizations, it noted.