Alternative Asset Managers Should Be Valued By Distributable Earnings

Alternative asset managers have become more popular in the last few years, but with a different mandate than traditional AMs that allows them to invest across investment cycles, normal valuation methods may not give an accurate sense of the alt’s potential for growth.

Carried interest more than half alternative asset managers' pretax income

“With volatile and less predictable earnings, the market has been reluctant to assign a comparable traditional asset manager P/E on the Alts’ carried interest income stream,” writes Deutsche Bank analyst Brian Bedell.

Earnings from fees are being valued at higher multiples than carried interest, even though carried interest accounts for a majority of Alt’s pretax income and more reliably translates into cash distributions down the road.

“We prefer to value the...