MarsBars
Prominent billionaire investors have recently been pouring capital into the Alternative Investments sector. For example, Mario Gabelli of GAMCO Investors recently increased his stake in KKR (KKR), a leading alternative asset manager. Prominent investor Ron Baron also recently opened a new position in KKR. Additionally, famous value investor Joel Greenblatt also made a significant increase in his KKR stake.
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 added to its position in BAM, as did Ron Baron, who added to his BAM stake for the second straight quarter.
Moreover, both of these alternative asset managers as well as peers like Blackstone (BX), Blue Owl Capital (OWL), Carlyle Group (CG), and others, have all been reporting very strong fundraising momentum in recent quarters and years. This trend seems likely to continue for the foreseeable future, with each of these management teams guiding for continued very strong fundraising growth as the aging of populations across developed economies of the world indicates that more and more investors and institutions are going to be putting a priority on stable, dependable cash flows and attractive returns that alternative investments such as private credit, real estate, infrastructure, and private equity are known for generating.
Additionally, there is a significant need for additional investment in alternatives, such as infrastructure, due to the need for a massive build-out of infrastructure to fuel the AI boom and the Fourth Industrial Revolution, as well as the relocation of much of the world's supply chain due to growing geopolitical risks in China and Taiwan. On top of that, there are attractive opportunities to invest in residential real estate in numerous markets, especially in the U.S., where there continues to be a housing shortage that has driven up rent significantly in recent years. This is illustrated by the recent aggressive buying spree by alternative asset managers such as BX and KKR into multifamily and single-family publicly traded real estate companies and REITs.
Our Top Picks
With all this bullishness on alternatives, two of our favorites at the moment include OWL and Patria Investments (PAX). We like OWL because it has about 76% of its assets under management in permanent capital funds. Additionally, its income comes entirely from fee-related earnings, as opposed to carried interest, making its earning stream much more stable and dependable than many of its peers.
On top of that, OWL is highly concentrated in the private credit and direct lending space, with about half of its assets under management in this sector. This sector, in particular, is enjoying very strong growth right now and should continue to do so moving forward, giving it a more attractive growth profile. This is reflected in the fact that analysts expect its earnings per share to grow at a roughly 20% CAGR through 2026 compared to just 15.6% for BAM and 13.2% for BX. Despite that, OWL also trades at a lower price-to-earnings ratio of 19.8 times versus BX's 26.5 times and BAM's 26.8 times. Yes, it is a little riskier than those due to it having a lower credit rating and being smaller in size, as well as being more concentrated in direct lending, which is a less proven sector over the long term than real estate and infrastructure where BX and BAM have greater 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 liquidity, and no debt maturing before 2028. Additionally, its dividend is growing very rapidly, and management expects to continue growing its dividend aggressively moving forward, with a target of paying about a $1 per share dividend by either 2025 or getting close to it. This past year alone, OWL has grown its dividend by 29%.
Meanwhile, we are bullish on PAX because its dividend yields 5.4% and is very well covered by fee-related earnings with a mere 44% payout ratio. On top of that, its P/E ratio of 7.6x is way below that of peers, yet its expected EPS CAGR is higher than theirs (the analyst consensus estimate EPS CAGR for PAX is 25.2% through 2026, 20.6% for OWL through 2026, 13.2% for BX through 2028, and 15.6% for BAM through 2026).
Yes, PAX has greater risk due to its smaller size and its concentration in more geopolitically unstable Latin America, but the deep discount it enjoys in its valuation seems outsized relative to this incremental risk. This is particularly true given that Latin America has very attractive macro tailwinds from the expected boom in commodities in the coming years (Latin America is a major commodity producer and exporter) as well as the decoupling from China going on in the United States that is likely going to benefit Latin American countries - especially Mexico (which is one of PAX's main markets to invest in) - significantly. As a result, we favor PAX as a deeply undervalued high-yield/high-growth way to get exposure to Latin America in our portfolio.
Investor Takeaway
With stocks like OWL and PX, investors can combine an attractive mid-single-digit dividend yield-5% for OWL and 5.4% for PX-along with very strong growth moving forward, with earnings streams that should be fairly stable even if the economy enters a downturn. Yes, growth will likely decline, and so will the valuation multiple, but from a long-term perspective for patient investors, both PX and OWL appear poised to deliver attractive risk-adjusted total return potential.
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