The Federal Reserve’s pause on interest rate hikes may create a new set of winners and losers in asset management.
During the past 12 months, higher interest rates have sent the shares of some investment firms, like those focused on fixed income, soaring and dented others. Now, a prolonged high-rate period could accentuate that.
“While the interest rate backdrop is just one relatively indirect factor, for most asset managers, we do believe there are important implications within the group,” KBW analysts wrote in a report June 16.
Shares of Apollo Global Management are up 54 percent over the past 12 months, but higher interest rates for a longer period would be a tailwind for the company, given its insurance business. “Apollo Global Management is a direct beneficiary from the higher rate environment, predominantly due to Athene, as incremental rate hikes are supportive of spread related earnings (SRE) and fixed annuity demand overall,” KBW analysts said.
Other publicly traded alternative asset managers have performed relatively well over the same period and have the potential for more upside if interest rates remain elevated or rise. Over the past 12 months, shares of Ares Management and Blue Owl were up 59 percent and 14 percent, respectively. More than 90 percent of the assets within their credit businesses are floating rate, which puts them in position to benefit from the high-rate environment, according to KBW. However, KBW favors Ares over Blu Owl because of the former’s $88.6 billion in dry powder and its track record.
Smaller alternative managers are also benefiting from the same market circumstances, making those firms — especially private credit managers — attractive acquisition targets.
BlackRock has been growing its alternative investments business and posturing to acquire other firms, as it did with London-based growth and venture debt manager Kreos. But a longer high-rate environment is also good for BlackRock’s massive fixed-income business, said KBW.
For some alternatives firms, and for traditional asset managers, a prolonged high-rate environment would be unwelcome news.
“The high-rate backdrop could prove to further weigh on the outlook for private equity — with increased skepticism about return potential on an absolute basis — due to even higher financing costs and, on a relative basis, with even higher risk-free returns,” KBW said. That is the case for Carlyle Group, TPG, and Blackstone.
According to KBW, a longer elevated interest rate period could also stunt 2023’s stock rally, to the detriment of T. Rowe Price and other asset managers that tilt toward growth equities.
In a note at the start of the year, Alex Blostein, lead capital markets analyst at Goldman Sachs Investment Research, and other analysts at the bank correctly predicted that various asset managers would perform differently this year. They expected “2022 cyclical dynamics to linger, creating a wide spread in 2023 earnings growth trajectory among the alt managers (from +20 percent to -10 percent) and amplifying distinct business model differences across the space.”
Higher rates generally have a neutral or negative impact on most asset managers, since they put pressure on the value of assets and weigh on capital markets activity. Beyond asset managers, brokers and wealth management firms, such as Charles Schwab and Raymond James — both of which also have their own asset management businesses, and LPL, could benefit from an extended high-rate environment, Blostein said in an e-mail.
“We started to see moderation in core deposit outflows from the brokers, further supporting net interest income and revenue as a whole for longer than the market is perhaps pricing in,” Blostein said.
