OWL - Passive Income: 2 Under-The-Radar Asset Managers To Buy Today

Summary

• Alternative assets under management are projected to grow by double digits over the next five years.
• On the subject of alternatives, most investors think of the major players like Blackstone, Brookfield, and Apollo.
• But we like these two under-the-radar asset managers even better.
• They not only provide attractive dividend yields today, they promise strong dividend growth for years to come.

The world of alternative assets is growing like a weed.

"Alternative assets" is a term referring to any investments outside the realm of publicly traded stocks, bonds, or cash. It includes real estate, infrastructure, private equity, private credit, venture capital, hedge funds, insurance products, and art.

Alternative assets under management is projected to grow fourfold from 2010's level to $17.2 trillion in 2025, driven almost entirely by investments from institutions and high net worth individuals. Another estimate from analytics firm Preqin puts the total alternatives AUM at $18.3 trillion by 2026, nearly two times the $9.3 trillion under management at the beginning of 2022.

According to Preqin, the global alternatives market grew at an average annual rate of 14.9% from 2015 to 2021, and that growth rate is expected to slow to 11.9% annually from 2022 to 2026.

The primary drivers of growth over the next five years, according to Preqin, will be venture capital (19.1% annual growth), infrastructure (13.3%), and private debt (10.8%).

At High Yield Investor, we love the alternative asset management business model, which charges fees to investors for access to their funds. As AUM grows, so too will the asset managers' fees and fee-related earnings ("FRE").

When the topic of alternative asset managers comes up, most investors' minds immediately go to the biggest players in the space like Blackstone ( BX ), Brookfield Asset Management ( BAM ), and Apollo Global Management ( APO ).

But these are behemoths, each with $500 billion to $1 trillion under management. As asset managers become huge, it becomes progressively harder to achieve the same levels of growth. All else being equal, it would take an exponentially growing AUM to achieve the same growth rate over time.

As such, we tend to prefer some of the smaller asset managers that may be under the radar for most investors but offer strong growth potential. As their AUM grows over time, so too should their generous dividends.

In what follows, we pitch two of our favorites.

1. Blue Owl Capital ( OWL )

OWL was formed through the merger of Dyal Capital and Owl Rock and went public in May 2021. The asset manager has three primary investment strategies:

Direct Lending is akin to a business development company ("BDC") that makes private loans to middle-market businesses backed by private equity sponsors.

GP Capital Solutions is a similar business that makes both debt and equity investments to general partners of alternative asset businesses.

Finally, Real Estate is exactly what it sounds like, but OWL particularly focuses on the net lease asset type. Notably, OWL is on the verge of closing on its ~$9.1 billion buyout of STORE Capital ( STOR ), which will expand its real estate AUM by nearly 50%.

In a relatively short period of time (just a little less than 2 years), OWL has rapidly expanded its AUM across all three strategies, and along with that AUM expansion has come FRE and dividend growth.

In just one year, from Q3 2021 to Q4 2022, OWL's AUM surged 97% from $70.5 billion to $138.1 billion. Meanwhile, during that time, FRE surged 48% from $141.9 million to $209.8 million.

What's more, a differentiating element of OWL's AUM is the fact that nearly 80% of it comes from "permanent capital," or funds invested with no termination date. This increases the stability of its AUM and prevents the need to do more rounds of fundraising down the road.

And yet, even after this rapid AUM expansion, OWL maintains a very strong balance sheet, ample liquidity, and a low cost of debt thanks to some well-timed issuance of long-term bonds over the last few years.

OWL offers a dividend yield of 3.9%, but that dividend will likely grow at a rapid rate going forward as the asset manager seizes on opportunities to expand its AUM and FRE.

2. Patria Investments ( PAX )

PAX is the leading asset manager in Latin America, a continent that is rife with growth opportunities as well as unique risks. But those unique risks, both political and economic, make partnering with a local management company that has ample experience navigating the environment, a must.

In 1990, only 23% of the population of South America was in the middle class. By 2020, that share had risen to 47%, and by 2040, it is projected to rise to 64%. This growth in income per capita should open up vast investment opportunities, especially as institutional capital shifts from traditional assets to alternatives.

For example, private equity has only a 1.3% penetration in Latin America (percentage of GDP), compared to the global average of 7.4% and the North American level of 14.2%.

Plus, though PAX has investments all over Latin America, its primary countries of concentration are Brazil, Chile, Colombia, and Mexico, which offer some of the most stability in the region.

PAX operates across six investment strategies, but its primary three are private equity, infrastructure, and credit. Since the company's IPO on the Nasdaq two years ago in January 2021, the firm's total AUM has nearly doubled in size.

Most of the growth has come from credit and the smaller strategies: public equities, real estate, and advisory & distribution.

From the beginning of 2021 to Q3 2022, FRE soared by 2.3x. And since PAX is committed to paying out 85% of its distributable earnings, that growth in FRE and DE has resulted in a very nice dividend payout.

PAX aims to nearly double their AUM again to $50 billion by 2025.

In turn, this should result in DE per share growth roughly doubling from the 2020 to 2022 period to the 2023 to 2025 period.

If PAX achieves this growth, the dividend will grow to about $1.86 annually, which would represent an enormous ~12% yield on the current stock price of $16. And they aim to achieve this within three years!

Perhaps management's ambition will prove too lofty, but even if they get close to their goal, an investment in PAX at today's price would prove a phenomenal success.

Bottom Line

Alternative asset managers are poised for massive growth in the years ahead. It's difficult to overstate the opportunity that lies before them as institutional investors look for ways to increase their returns and high net worth investors look to diversify away from traditional investments.

For investors on the hunt for growing passive income streams, we think buying asset managers like OWL and PAX today will ultimately prove to be a smart move.

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