If you thought that private equity was lucrative for partners because of management fees, you are correct. However, asset management is a business like any other and can also enrich partners by tapping the public markets. Today The Deal reported that Partners Group AG, a Swiss private equity and hedge fund-of-funds will go public, valued at around 1.8 billion Swiss francs ($1.4 billion). Partners Group was founded in 1996 and is reported to have around 10 billion Swiss francs in client assets. The revenue is reported as around 125 Swiss francs.
So this is another clear reason why I love private equity and asset management businesses. Not only can you realize outsized gains historical to other asset classes by investing in it, you can build value as a stand alone asset management business.
Asset management buinesses are great businesses because there are really two main metrics that you need to worry about. One is assets under mangement. The other is margin from those assets. If you are a brokerage, then the latter metric is very important. In this day of decimalization and low cost commissions, you need to increase your margin by any means necessary. In an asset class like private equity, assets under management is key. You already have a high margin set of products, so you need to grow that asset size. In private equity, another benefit is that product life cycles are long (most funds run ten years long).
Don't get me wrong, asset management is a terribly fickle business. When the markets crash, everybody wants out, and assets under management shrink. The key is to make sure your investors make money over a long cycle and then they will come back for more. If and when you get tired of running the business, prepare it for a sale or take it public, you will be rewarded.
One thing I didn't mention about asset management and private equity as a business is that not only are investors fickle, but partners are as well. Partners want to get well compensated and will jump ship to another firm if they don't get what they want. If they are uncomfortable with their situation, they won't think twice about spinning out to start their own firm AND taking a lot of strong partners with them. This is particularly true of a field such as investment banking, that tend to draw the "I control my own destiny" type of people. So talent retention is a major issue in asset management.
At any rate, I love asset management as a business. If any of my readers have experience and interest in starting asset management businesses, we love to invest in great talent to add to the industry. Please drop me a line.
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