Walking against the wind

Despite an array of headwinds, Fitch Ratings says European alternative investment managers are poised to withstand the challenges.

In a new report the rating agency said it expects firms in the sector to be able to weather the storm of economic uncertainty, market volatility and tighter financial conditions, which is putting pressure on their financing, capital deployment and returns.

The firm said the financial health of alt managers is supported by the fact that investor capital is often locked-in, fee revenue is being generated on invested capital, and the tougher environment may present opportunities for alt managers to deploy their uninvested capital — or their “dry powder.”

“Fee-related earnings at [alt managers] have remained robust due to continued management fee growth, given strong fundraising in recent years,” it said.

However, a slower fundraising climate could pressure the growth of management fees, it noted, and certain firms could be stung by weaker valuations.

“Investment managers with significant balance sheet usage are exposed to the negative effects of fair-valuing of investments, though potential losses are likely to be largely unrealized, with the impact mitigated by positive fee-related earnings,” it said.

Smaller, less-diversified firms will likely be more vulnerable to industry challenges, which could lead to further consolidation, it said. “Market leaders will continue diversifying into asset classes such as private debt and infrastructure, which are more resistant to the current macro pressures.”