PGIM Alts Forum Part II: The Changing Landscape for Private Credit
In Part 2 of PGIM’s Alts Forum, we explore the opportunities and risks surrounding a range of private credit strategies.
Trends in the asset management industry are re-shaping the alternatives world
In the past, alternative investment managers were seen as the epitome of boutique: independent, niche, with an exclusive client group. They were expensive specialists, located in the best neighbourhoods, with their cloth cut to fit particular investment tastes. By contrast, established investment managers were the department stores: large, mainstream, conservative, with a wide range of conventional offerings.
Now, if it was ever as simple as that, the picture has become blurred. Some alternative investment firms have become very large and some traditional asset managers are successfully running alternative strategies.
One thing is clear -- in recent years it has become increasingly difficult for new boutique alternative investment firms to become established. Preqin has been monitoring hedge fund launches and liquidations for the last 20 years, and 2019 was the first year when the number of hedge funds liquidated exceeded the number launched.
Since the Global Financial Crisis, investors have become more reluctant to provide capital for start-ups, and smaller managers have found it difficult to obtain critical mass. COVID-19 has probably accelerated that trend, partly because remote due diligence is easier with an established firm.
At the other end of the scale, alternatives firms have been consolidating and the large have been getting larger. A number of former hedge fund boutiques have become mega-managers in their own right, developing multi-strategy and multi-asset capabilities. Private capital and real estate managers have combined with other alternatives disciplines whilst traditional mainstream asset managers have been building out their alternatives capabilities. A talented and ambitious portfolio manager is more likely to stay within a larger organisation or join an established firm than set up his or her own boutique.
The benefits of a boutique structure are that decisions are focussed, investment managers can think independently, ideas can be scaled without market impact, and rewards can be more readily apportioned. On the downside, boutiques need to spend a greater proportion of their income on operational matters such as compliance, risk management, research and distribution. They can be dominated by one individual, making succession difficult and sustainability questionable. In acknowledgement of this, large investment houses have developed management systems to create conditions that allow for a sense of entrepreneurship and investment freedom within the fold.
The multi-affiliate model (sometimes referred to as multi-boutique) may arguably be the most successful at delivering the best of both worlds, combining as it does the benefits of size with those of independence. It enables best-in-class decision making, maintains independence of thought, appropriate economic arrangements and focus. At the same time, affiliated firms can benefit from the resources of a large parent in areas such as technology provision, compliance, distribution, provision of seed capital and strategic vision. Their investor clients will gain from having the comfort of a long-term strategic partner with the resources to provide market, asset allocation and macro knowledge alongside performance-driven investment strategies.
Small, it seems, is no longer considered quite as beautiful in the alternatives world.