Billionaire Investors Buy Hand-over-Fist Alternatives

Prominent billionaire investors have recently invested capital in the Alternative Investments sector. For example, Mario Gabelli of GAMCO Investors recently increased his stake in KKR ( KKR ), a major alternative asset manager. Recently, prominent investor Ron Baron opened a new position in KKR. In addition, famous investor Joel Greenblatt also made a significant increase in his stake in KKR.

Meanwhile, another prominent alternative asset manager, Brookfield Asset Management (BAM), was recently added to the portfolio of Steven Scruggs, who manages the FPA Queens Road Small Cap Value Fund. Third Avenue Management also grew its position in BAM, as did Ron Baron, which added to its BAM stake for the second quarter in a row.

Moreover, both these alternative asset managers and peers such as Blackstone (BX), Blue Owl Capital (OWL), Carlyle Group (CG).), and others, have all reported very strong fundraising momentum in recent quarters and years. This trend looks set to continue for the foreseeable future, with each of these management teams guiding for very strong continued fundraising growth, as the aging population of the world’s developed economies indicates that more and more investors and institutions will make it a priority. on stable, reliable cash flows and attractive returns that alternative investments such as private credit, real estate, infrastructure and private equity generate.

Additionally, there is a significant need for additional investment in alternatives such as infrastructure due to the need for massive infrastructure development to fuel the AI ​​boom and fourth industrial revolution, as well as the relocation of much of the world. supply chain due to growing geopolitical risks in China and Taiwan. In addition, there are attractive opportunities to invest in residential real estate in many markets, particularly in the US, where there continues to be a housing shortage that has driven rents up significantly in recent years. This is illustrated by the recent spate of aggressive purchases by alternative asset managers such as BX and KKR in publicly traded multifamily and single-family real estate companies and REITs.

Our top picks

With all this optimism about alternatives, two of our favorites right now include OWL and Patria Investments (PAX). We like OWL because it has about 76% of its assets under management in permanent equity funds. Additionally, its income comes entirely from fee-related earnings, as opposed to carried interest, making its earnings stream much more stable and reliable than many of its peers.

In addition, OWL is highly concentrated in the private credit and direct lending space, with approximately half of its assets under management in this sector. This sector in particular is enjoying very strong growth at the moment and should continue to do so going forward, giving it a more attractive growth profile. This is reflected in the fact that analysts expect its earnings per share to grow at around 20% CAGR through 2026, compared to just 15.6% for BAM and 13.2% for BX. Despite this, OWL also trades at a lower price-to-earnings ratio of 19.8x compared to BX’s 26.5x and BAM’s 26.8x. Yes, it is slightly riskier than those due to the fact that it has a lower credit rating and is smaller in size, as well as being more concentrated in direct lending, which is a less proven long-term sector than real estate and infrastructure in which BX and BAM have a higher concentration.

That said, OWL’s balance sheet is still in pretty strong shape, with a BBB credit rating from S&P, $2 million in available cash, and no debt maturing before 2028. Plus, its dividend is growing very quickly, and management expects to continue to grow. dividend is moving forward aggressively, with a goal of paying a dividend of about $1 per share either by 2025 or close to it. In the past year alone, OWL has increased its dividend by 29%.

Meanwhile, we’re bullish on PAX as its dividend yields 5.4% and it’s very well covered by fee-related earnings with a payout ratio of just 44%. Additionally, its P/E ratio of 7.6x is well below peers, yet its estimated EPS CAGR is higher than theirs (analyst consensus EPS CAGR estimate for PAX is 25.2% through 2026, 20 .6% for OWL by 2026, 13.2% for BX by 2028 and 15.6% for BAM by 2026).

Yes, PAX has more risk due to its smaller size and focus in the more geopolitically unstable Latin America, but the deep discount it enjoys in its valuation seems outweighed by this incremental risk. This is especially true given that Latin America has very attractive macro headwinds due to the expected commodity boom in the coming years (Latin America is a large producer and exporter of commodities) as well as the decoupling from China that is taking place in The United States, which is likely. will benefit Latin American countries – especially Mexico (which is one of the main markets for PAX to invest in) – significantly. We therefore favor PAX as a deeply undervalued high yield/high growth way to gain exposure to Latin America in our portfolio.

Investor Takeaway

With stocks like OWL and PX, investors can combine an attractive dividend yield of 5% for OWL and 5.4% for PX, along with very strong growth going forward, with earnings streams that should be fairly stable even if the economy goes into a recession. Yes, growth is likely to decline and so is the valuation multiple, but from a long-term perspective for patient investors, both PX and OWL look poised to offer attractive risk-adjusted total return potential.