The State of Affairs In The Alternative Asset Management Industry
The alternative asset management industry is closing 2016 with north of $8 trillion dollars under management. The hedge fund industry and commodity trading advisors have experienced a particularly difficult period during the first half of 2016 and launches have slowed dramatically. Conversely, private equity and venture capital have been attracting assets at a rapid pace. While, the current popularity of venture capital is understandable given the current rate of innovation and technological advances, private equity is much less so. While the current private equity returns are attractive on a relative basis it must be understood that many of these funds involve five to ten year-old vintage investments. The current market for portfolio companies has become very competitively priced (if not overpriced), and thus future returns are apt to be more muted.
The barrier to entry within the alternative asset management arena is higher than ever and capital raising has become extremely difficult in certain sectors. It will be interesting to see what, if anything, the Trump administration will do to limit regulatory burdens and ease the path of general partners within the U.S. There were a couple of rays of sunshine during 2016 among the clouds of regulatory burdens. For one, Reg A+ offerings began to hit the market. This new law permits issuers to raise up to $50mm every 12 months with an abbreviated registration process and permits non-accredited investors to participate. Another interesting 2016 development was an SEC proposal to alter the definition of “accredited investor” to permit knowledgeable investors (but below the historical income / asset limits) the ability to invest with private managers.
Another broader issue that is affecting the alternative investment industry is cybersecurity. This has become a top of mind issue across the industry and the SEC has already begun cyber exams of registered advisors. If advisors haven’t invested in this area yet, time is short. Even beyond the risk of SEC fines and sanctions, a loss of investor data can close a fund faster than poor returns. Managers need be diligent in their cyber security compliance.
In the asset class area, 2016 witnessed a continued expansion of market place lenders (“MPLs”). MPLs are epitomized by firms like Lending Club, Prosper and OnDeck but the industry stretches all the way to merchant cash advance firms and everything in-between. MPLs are, of course, simply filling the void left by the money center banks which pulled out of the space following the 2008 financial crisis. Direct lending has absolutely exploded across the alternative investment universe in the past two years. You see MPLs of all sorts either being invested in or acquired by alternative funds every day now. Funds are also buying loans (whole loans, participations and syndications) from MPLs at an ever increasing pace. The funds buying these loans include both credit funds formed expressly for such purpose as well as hedge funds whose base strategy is at capacity or simply as an investment for excess liquidity. The yields can be compelling.
The new year will likely see the above trends continue. The new administration may empower managers to grow faster than ever. One thing that will remain is the need for managers to be ever diligent around compliance. Not only will the SEC and other regulators require such diligence but investors are demanding it.
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Anthony Tuths, JD, LLM 212.829.3203 [email protected] View Experience
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