Alternative Asset Managers continue to operate with elevated levels of uncalled investment capital, or dry powder, at a time when credit markets are frothy and valuations are high, according to Fitch Ratings.
With more capital chasing fewer deals, significant fund underperformance is possible if competition bids prices up further, according to a special report on the alternative asset management industry published today by Fitch. Outsized vintage concentrations and a lack of distressed investing opportunities, a traditional area of investment competency for alternative asset managers, could potentially exacerbate this issue.
Despite these challenges, Fitch's rating outlooks for all seven rated alternative asset managers are stable, reflecting strong franchises driving increased investor allocation to offered alternative investments, relatively stable core operating fundamentals due to the locked-in nature of a large portion of fee revenue; modest but moderately increasing leverage levels; manageable near term obligations relative to available liquidity resources; and increasing diversity of asset under management (AUM).
“Alternative asset managers are trying to take a measured approach with their dry powder,” says Meghan Neenan, Senior Director. “Having high levels of dry powder on hand positions these firms with investable capital to use in the next downturn in the credit cycle, but waiting for the opportunity to materialise can be challenging.”
Dry powder for the firms in Fitch's review totalled USD188.2 billion as of 30 September, 2014, representing a 6.3% increase from a year earlier.
Real estate funds saw peak levels of dry powder this year, reaching USD217.6 billion in October 2014, while distressed and buyout funds saw slight decreases to USD63.1 billion and USD470.5 billion respectively. That said, uncalled buyout capital remains near all-time highs, despite a record level of exit activity to date in 2014. Fitch expects real estate funds to remain relatively active in the next year, given the volume of assets potentially for sale in the US and abroad, while buyout and credit funds look for more unique pockets of attractive opportunities around the globe.
