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The alternative asset management industry is undergoing consolidation. In the last few months, two major mergers were announced:
Franklin Templeton is purchasing Benefit Street Partners, a $26 billion alternative credit manager, to “bolster Franklin Templeton’s alternative offerings and expand its robust fixed income capabilities to include an array of alternative credit strategies, at a time when investors are increasingly allocating capital to less liquid and higher yielding credit opportunities.” This merger will bring Franklin Templeton’s alternative asset business to over $40 billion and total AUM over $700 billion. (Disclosure: My brother works at BSP)
Brookfield Asset Management is purchasing a 62% stake in Oaktree Capital Management for ~$4.7 billion. The plan is for Brookfield to own 100% of Oaktree by 2029. The combined firm will become one of the largest alternative asset managers in the world with over $475 billion in AUM and $2.5 billion in fee-related revenue annually.
This trend will likely accelerate too. “We could see more M&A across the sector as aging founders of alternative managers seek a liquidity event and money managers bolster capabilities in alternatives,” Michael Cyprys, a Morgan Stanley analyst, said in a recent note to clients. Additionally, David Fann, President and CEO of TorreyCove Capital Partners LLC, believes that another driving force for this consolidation is that "many of the largest LPs are reducing the number of key relationships to just a handful."
Now why is this important to crypto?
In my opinion, blockchain and crypto-related investment opportunities will be one of the fastest growing sectors in the alternative asset management space in the next 10 years. This means that every alternative asset manager will have to create a strategy to help their LPs gain exposure to the nascent industry.
As these firms begin to enter the space, many of them will choose to either (1) spend ungodly amounts of money to hire talented & experienced crypto investors or (2) pay up to acquire asset management firms that specialize in blockchain and crypto. While the strategy is easy to identify, there may be a number of complexities.
The most obvious is the lack of culture fit between most crypto asset management firms and the more traditional alternative asset managers. The difference is apparent in everything from dress code to ethos, which will make 50% or more of the crypto asset management firms unattractive opportunities for the incumbents. Additionally, there are current challenges around capacity constraints (the entire crypto market is valued at less than $150 billion currently), regulatory uncertainty, and a lack of understanding on how to underwrite the risk in many crypto investment opportunities.
These issues will eventually be worked out though, and I anticipate the macro-trend of consolidation in alternative asset management will spill over to include crypto asset managers. This is because every alternative manager will be forced to manage funds in the “crypto industry” in the next decade. Whether it comes under their purview through Bitcoin, the public crypto market, venture capital, or tokenized assets, the writing is on the wall at this point.
Some firms will drag their feet and wait to see how the industry plays out. Others will be opportunistic and gain a significant advantage by having a head start. If you thought 2017’s bull market was big, just wait till the trillions of dollars allocated to alternative assets begin to roll in.
The next bull market will be bigger than anything we have ever seen before.
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Crypto Investment App Donut Raises $1.8 Million in Seed Funding: Cryptocurrency investment app provider Donut has raised $1.8 million in a seed funding round. The Germany-based startup told CoinDesk on Thursday that the round was led by early-stage venture capital firm Redalpine. Other investors included technology venture funds EarlyBlock and Entrepreneur First, AngelList’s Philipp Moehring and Andy Chung, N26 bank board member Marcus Mosen, and others. Read more.
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