The Rise of Alternative Asset Management Firms: A Secret Force In Today's Society
Connor Engelsberg The growing importance of alternative asset management companies and their significant effects on big businesses and the financial markets are examined in this thesis. These companies, which manage huge assets totaling trillions of dollars, have emerged as important actors as the traditional investing landscape changes. This study examines the degree of control and impact big firms have over businesses and marketplaces using a qualitative research design. The tactics used by these corporations in shareholder activism and corporate governance decision-making are looked at through studying in- depth interviews and case studies. The study emphasizes how alternative asset management affects a range of stakeholders, including investors, regulators, and the economy as a whole. When navigating the complexity of alternative assets, it highlights the value of diversification and thorough scrutiny for investors. In order to address potential dangers and conflicts of interest, the research also recommends strengthened regulatory oversight. Furthermore, the part played by these companies in promoting environmental, social, and governance (ESG) factors in investment decisions is investigated. 5 Findings show that alternative asset management companies wield a variety of control over organizations around the world, differing across legal systems and economic advancement. It is also noted that corporate control and labor market rules are related. The thesis adds to the body of literature by illuminating the particular qualities of alternative asset management companies and their changing influence on societal and financial environments.
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Contents
1.2. Rationale for the Study 10
1.6. Significance of the Study 18
Chapter 2: Literature Review 20
2.2. Historical Development of Alternative Asset Management Firms 21
2.3. Strategies and Investment Approaches of Alternative Asset Management Firms 27
2.3.1. Rationale and Potential Benefits of Alternative Investment Strategies 29
2.3.2. Performance and Risk Characteristics 29
2.4. Influence and Control of Alternative Asset Management Firms over Corporations 30
2.4.1. Influence and Control of Alternative Asset Management Firms over Corporations 30
2.4.2. Potential Implications and Concerns 31
2.5. Implications of Alternative Asset Management Firms on Financial Markets 32
2.6. Regulatory Landscape and Oversight of Alternative Asset Management Firms 34
2.7. Environmental, Social, and Governance (ESG) Considerations in Alternative Asset Management 35
Chapter 3: Research Methodology 38
3.5. Validity and Reliability 42
3.6. Ethical Considerations 42
Chapter 4: Findings and Discusion 43
4.1. Extent of Control and Influence over Major Corporations 43
4.1.1. Strategies Employed by Alternative Asset Management Firms 44
4.1.2. Shareholder Activism and Engagement in Corporate Governance 45
4.1.3. Impact on Corporate Decision-Making and Strategic Direction 45
4.2. Influence over Financial Markets 47
4.2.2. Implications of Large-Scale Investments and Divestments 47
4.2.3. Market Reactions to Firm Actions 48
4.2.4. Potential Risks and Concerns 48
4.3. Implications for Investors 49
4.3.1. Influence on Major Corporations and Financial Markets 49
4.3.2. Impact on Portfolios and Risk Exposure 49
4.3.3. Benefits and Risks of Investing in Alternative Assets 50
4.3.4. Importance of Investor Awareness and Due Diligence 50
4.4. Implications for Regulators 51
4.4.1. Influence on Corporations and Financial Markets 51
4.4.2. Effectiveness of Current Regulatory Frameworks 51
4.4.3. Need for Enhanced Regulatory Oversight 52
4.4.4. Measures for Market Stability and Investor Protection 52
4.4.5. Promoting Transparency and Accountability 52
4.5. Implications for the Overall Economy 53
4.5.1. Role in Shaping Economic Trends and Capital Allocation 53
4.5.2. Role in Job Creation 55
4.5.3. Systemic Risks and Concentration of Assets 55
4.5.4. Impact on Economic Growth and Stability 56
4.6. Synthesis and Discussion 56
4.6.1. Key Findings and Implications 56
4.6.2. Overall Significance 57
4.6.3. Contributions to Existing Literature and Future Research 58
5.1. Recommendations for Investors 61
5.2. Limitations of the Study 62
5.3. Future Research Directions 63
Table of Figures
Figure 1: Absolute alternative assets AUM growth: 2021A-2026F (CAIA, 2022) 7
Figure 2: Stone Beats Rock (Gandel, 2019) 8
Figure 3: Total Revenue Of Blackrock (CreditLoan, 2019) 10
Figure 4: Investor Familiarity With Alternative Investments (Hall, 2023) 13
Figure 5: Global Assets Under Management (Ross, 2021) 15
Figure 6: Rediscovering alternative assets in changing times (PwC, 2017). 22
Figure 7: Alternative Investment Performance (Jacoby, 2018) 23
Figure 8: Growth of Private Market Assets Over the Past 20 Years (Preqin, 2020). 24
Figure 9: Number of companies targeted by activist investors by market cap (Kostin et al., 2023). 25
Figure 10. Corporate Control across Legal Families (Aminadav et al., 2019). 45
Figure 11: Distribution of Non-Investment Employees across Firms 45
Figure 12: Ratio of 2022 fee-bearing AUM to full-time investment professionals 48
Figure 13: Investment in traditional alternatives (Jegen, 2022) 55
Figure 14: Growth in assets under management by asset classs (Rouleau, 2017) 56
Table of Tables
Table 1: Summary of In-Depth Interview Results 46
Table 2: Market Impact of Large-Scale Investments and Divestments 48
Table 3: Implications for Investors 50
Table 4: Evaluation of Current Regulatory Frameworks 52
Table 5: Investments and Economic Impact 54
Abstract
The growing importance of alternative asset management companies and their significant effects on big businesses and the financial markets are examined in this thesis. These companies, which manage huge assets totaling trillions of dollars, have emerged as important actors as the traditional investing landscape changes. This study examines the degree of control and impact big firms have over businesses and marketplaces using a qualitative research design. The tactics used by these corporations in shareholder activism and corporate governance decision-making are looked at through studying in-depth interviews and case studies. The study emphasizes how alternative asset management affects a range of stakeholders, including investors, regulators, and the economy as a whole. When navigating the complexity of alternative assets, it highlights the value of diversification and thorough scrutiny for investors. In order to address potential dangers and conflicts of interest, the research also recommends strengthened regulatory oversight. Furthermore, the part played by these companies in promoting environmental, social, and governance (ESG) factors in investment decisions is investigated. Findings show that alternative asset management companies wield a variety of control over organizations around the world, differing across legal systems and economic advancement. It is also noted that corporate control and labor market rules are related. The thesis adds to the body of literature by illuminating the particular qualities of alternative asset management companies and their changing influence on societal and financial environments.
Chapter 1: Introduction
1.1. Background
The financial sector, which is intricate and constantly changing, is crucial to the world economy. Traditional asset management companies have long dominated the market, providing investment management services to both private and public sector clients (Davis, 2004). These companies typically manage stock, bond, and other traditional asset portfolios with the main objective of producing competitive returns while reducing risk. Through the provision of a variety of investment products like mutual funds, exchange-traded funds (ETFs), and pension funds, traditional asset management companies have played a significant role in promoting investment options for both people and institutions (Lettau et al., 2018). These businesses use traditional investing techniques and are frequently subject to financial authority regulation to guarantee adherence to industry norms. The financial sector previously concentrated mostly on investments in conventional assets, such as stocks and bonds, which were seen as the cornerstone of investment portfolios. While these assets provided consistent returns over time, they also had some drawbacks, such as limited diversification options and market volatility exposure.
Figure 1: Absolute alternative assets AUM growth: 2021A-2026F (CAIA, 2022)
The necessity for risk reduction and diversification became more and more obvious as the financial markets developed. Investors were looking for innovative investment techniques with higher potential returns and lesser connection to conventional asset classes (Brandstetter et al., 2016). As a result of this demand, alternative asset management companies have developed, offering access to non-traditional investments like infrastructure, real estate, hedge funds, private equity, and other non-traditional assets. Alternative asset management companies gave investors the chance to gain access to asset classes that were previously solely open to well-off and sophisticated investors. Institutional investors looking to diversify their portfolios and increase returns are drawn to these investments because they frequently have distinctive risk-return profiles and longer investment horizons (Thierie et al., 2016). Blackstone Group and BlackRock are two well-known examples of large alternative asset management companies, both of which have dramatically expanded in size and impact in recent years.
Figure 2: Stone Beats Rock (Gandel, 2019)
Stephen A. Schwarzman and Peter G. Peterson formed Blackstone Group, one of the biggest alternative investing companies in the world, in 1985. Private equity, real estate, hedge funds, credit, and infrastructure investments are among the company's main business segments (Phalippou, 2014). Blackstone has made a name for itself by being able to spot undervalued assets, restructure businesses, and produce significant returns for its investors. Leveraged buyouts, distressed asset investments, and high-profile acquisitions have all been done by Blackstone's private equity division. The company's real estate division holds a broad portfolio of assets around the world, including everything from office buildings to housing developments (Wilkinson et al., 2008). Additionally, Blackstone's credit division concentrates on a range of credit methods, such as distressed debt investments and mezzanine financing.
BlackRock, which was founded in 1988, is the biggest asset manager in the world and a pioneer in the provision of advisory, risk, and investment management services (Fichtner et al., 2017). BlackRock manages assets in a conventional manner, but it has also greatly increased its footprint in the alternative asset management industry. Hedge funds, private equity funds, infrastructure investments, and real estate funds are just a few of BlackRock's alternative investing products. Strategic collaborations and acquisitions made by the company have helped it expand and diversify across asset classes.
Figure 3: Total Revenue Of Blackrock (CreditLoan, 2019)
Alternative asset management companies have significantly changed the financial sector and the overall economy. Their emergence has altered investment techniques, generating more interest in unconventional and illiquid assets (Bérubé et al., 2014). These businesses have made it possible for investors to access distinctive sources of potential return by providing chances to engage in infrastructure projects, venture capital enterprises, and private corporations. The market concentration and potential conflicts of interest have become more of a problem as a result of this growing impact. Regulators and policymakers are closely monitoring corporations like Blackstone and BlackRock due to their size and significant influence because they want to promote fair competition and transparency in the financial sector (Magnuson, 2018).
1.2. Rationale for the Study
Alternative asset management companies have emerged as prominent players with enormous influence over big organizations and financial markets in the quickly changing economy of today. To comprehend the dynamics influencing the global financial landscape, it is essential to comprehend the reasons for their rise and influence. This section examines the factors influencing alternative asset management companies' rise to prominence, their expanding influence on big businesses, and any potential problems or safety concerns they may raise. The global economy underwent a significant turning point in 2008 as a result of the financial crisis, which exposed flaws in the established financial system and forced an evaluation of investment tactics (Andersson et al., 2008).
Traditional asset types, like equities and bonds, had increased volatility and large losses during the crisis. Investors looked for different investment solutions that would offer better diversification and risk management as a result of the market instability. To address this need, alternative asset management companies have become an essential resource, providing access to a variety of non-traditional assets like private equity, real estate, infrastructure, and more.
The capacity of alternative asset management companies to offer diversification outside of traditional assets is one of the main reasons these companies are so important in the modern economy. Traditional asset classes, such as equities and bonds, frequently move in lockstep with market circumstances. Contrarily, alternative assets like venture capital and real estate typically have smaller correlations with conventional investing (Bogle, 2017). Due to their low correlation, alternative assets can operate as a buffer against market volatility, lowering the risk of the entire portfolio. Additionally, compared to traditional investments, some alternative investments have historically shown the potential to offer higher risk-adjusted returns. For instance, private equity often entails investing in privately held businesses with the goal of enhancing their performance and obtaining more rewards upon exit. This approach has drawn investors looking for greater returns above and beyond what traditional assets can provide, making it successful for many alternative asset management companies.
Longer investment horizons are a trait that distinguishes alternative asset management companies from many traditional asset managers who prioritize short-term performance. Alternative managers can locate and take advantage of investing possibilities thanks to this long-term strategy that may not be immediately obvious in the open markets. Real estate, infrastructure, and venture capital are examples of assets that frequently need time and patient investments to produce returns. To fulfill their long-term commitments, institutional investors like pension funds and endowments place a premium on reliable and sustained returns over protracted periods. These institutions find alternative asset management firms to be appealing partners as they work to meet their long-term financial objectives and liabilities since their investment horizons are aligned with those of institutional investors.
Figure 4: Investor Familiarity With Alternative Investments (Hall, 2023)
The appeal of alternative asset management companies to institutional investors has also contributed to their growth. Traditional investment solutions could not offer enough diversification to satisfy institutional portfolios' need for risk management (Swensen, 2009). In order to improve risk-adjusted returns and lower total portfolio risk, several institutions have attempted to increase their exposure to alternative assets. Additionally, alternative asset management companies have proven proficiency in handling complicated and less liquid investments like infrastructure and private equity (Arouri et al., 2013). They are favored partners for institutional investors wishing to diversify their asset allocation beyond traditional markets due to their specific knowledge and experience.
Alternative asset management companies' rise to prominence and expansion in size have changed their roles from being inert passive investors to powerful participants in the financial markets and big corporations (Roe, 1993). Their huge ownership and participation in shareholder agitation give them tremendous influence over company governance and decision-making. Leading alternative asset management companies, including BlackRock and Blackstone, have amassed huge ownership investments in significant businesses across numerous industries. The ability of these businesses to carry out acquisitions, carry out private equity buyouts, and invest in strategic industries has given them significant influence over the course of these businesses.
These alternative asset managers, who are significant shareholders, actively participate in reshaping the business landscape by having a say in important choices about company strategy, capital allocation, and future mergers and acquisitions (Kraakman et al., 2017). Alternative asset management companies are becoming more active as shareholders, pushing for modifications to corporate governance procedures and strategic decision-making. These companies aim to address concerns about executive salaries, board diversity, and sustainability policies through active proxy voting and direct conversations with business management.
Figure 5: Global Assets Under Management (Ross, 2021)
Alternative asset managers can advocate for reforms they feel will increase long-term shareholder value by engaging in shareholder activism. Beyond conventional investment activities, their involvement in corporate governance concerns gives them additional impact (McNulty et al., 2016). The investment choices made by alternative asset management companies can have a significant impact on the financial markets due to the size of the assets they manage. Large-scale investments or divestitures made by these companies may have an effect on market liquidity, investor sentiment, and asset prices, perhaps causing market swings. Aside from affecting certain businesses and industries, alternative asset management firms can have a broader impact. Their trading activity and opinions on the state of the economy can influence general market sentiment, which in turn affects investor behavior and market dynamics.
The companies have improved the financial environment significantly, but their expanding influence and distinctive features have also given rise to a number of problems and difficulties that require addressing (Porter et al., 2002). The possibility for systemic risk is one of the main worries connected to the emergence of alternative asset management companies. These companies frequently have significant asset control, thus any poor investment management or performance could have far-reaching effects on the entire financial system. There is a greater chance of reduced market liquidity during stressful times when alternative asset management firms make sophisticated and less liquid investments. This lack of liquidity may make it more difficult for the corporations to fulfill redemption demands, which may cause market panic and wider financial instability.
Furthermore, systemic risks may be made worse by these companies' connections to other financial institutions and markets. The failure of one sizable alternative asset management firm could have ripple effects on the overall economy due to its sizeable assets, influence over major corporations, and impact over financial markets (Baluch et al., 2011). Conflicts of interest could be another problem brought on by alternative asset management companies' expanding prominence. Some of these companies conduct business as both investors and service providers, providing customers with a range of financial goods and services. Conflicts could arise as a result of this dual function since businesses might put their own interests ahead of those of their clients.
For instance, an alternative asset management company can choose to give its proprietary funds first dibs on the finest investment prospects, leaving its external clients with less desirable choices. This practice may not be in all investors' best interests and may lead to unequal treatment. Conflicts of interest can weaken public trust in the sector and cast doubt on the firm's business practices' fairness and openness. Private equity and hedge funds are two examples of alternative investments with a reputation for having little transparency. Investors find it difficult to completely comprehend the risks and potential rewards involved with these investments due to the lack of transparency. Investors may struggle with their due diligence if there is insufficient openness since they may not have access to enough data. Unexpected risks may be presented to investors, and it may be challenging to evaluate the genuine worth and performance of alternative assets due to a lack of clarity. For investors to be informed and capable of making wise investment decisions, alternative asset management must increase transparency.
Regulators and decision-makers have taken notice of the alternative asset management industry's growing influence and possible concerns. Market manipulation, unethical business practices, and the requirement for higher standards of corporate governance have all been sources of concern (Palepu et al., 2020). Regulators work to maintain the stability and integrity of the financial system while fostering innovation and competition in the financial sector. The purpose of calls for increased regulatory control is to address any potential concerns brought on by these enterprises' quick rise to prominence.
Alternative asset management companies have the power to influence environmental, social, and governance (ESG) practices because they are significant stakeholders in large organizations (Hill, 2020). For investors and society at large, it is becoming more and more crucial that investment strategies take sustainability and ethics into account. While some alternative asset management companies have made a concerted effort to incorporate ESG factors into their investment choices, others may place a higher priority on immediate financial rewards without sufficiently taking into account the broader social and environmental ramifications (Hill, 2020). Promoting ethical investing practices and encouraging alternative asset management companies to use sustainable investment techniques that follow ESG principles are necessary to allay these worries.
1.3. Research question
What is the extent of control and influence that alternative asset management firms have over major corporations and financial markets, and what are the potential implications for investors, regulators, and the overall economy?
1.4. Research objectives
To investigate and analyze the rise and significance of alternative asset management firms in today's economy, with a focus on understanding their role in reshaping investment strategies.
To examine and evaluate the extent of the influence and control that alternative asset management firms (e.g., Blackstone and BlackRock) exert over major corporations and financial markets, identifying key mechanisms and strategies employed.
To assess the potential implications and risks arising from the growing influence of alternative asset management firms on the stability and functioning of the financial system, as well as their impact on market dynamics.
To explore and propose strategies for addressing concerns related to conflicts of interest, transparency, and the alignment of investment decisions with environmental, social, and governance (ESG) principles, promoting responsible investing practices in the context of alternative asset management firms.
1.5. Research Hypothesis
H1: The greater the control and influence of alternative asset management firms (e.g., Blackstone and BlackRock) over major corporations, the higher the potential impact on corporate decision-making and strategic direction.
H2: Alternative asset management firms' long-term investment horizons and access to a diverse range of non-traditional assets will result in enhanced portfolio diversification and potentially higher risk-adjusted returns compared to traditional asset management firms.
H3: The rapid growth and concentration of assets under the control of a few large alternative asset management firms may pose systemic risks to the financial system, especially during times of market stress and illiquidity.
H4: The alignment of investment strategies of alternative asset management firms with environmental, social, and governance (ESG) principles will positively influence corporate behavior and sustainability practices among major corporations in which these firms hold significant stakes.
1.6. Significance of the Study
The analysis of the emergence of alternative asset management companies is crucial because it provides much-needed insight into the workings and effects of these shadowy organizations on the current financial landscape. These companies have grown to be significant actors, altering investment methods and controlling large businesses and financial markets. For a variety of stakeholders, including investors, regulators, and the general economy, understanding their function and behaviors is essential. In order to diversify their portfolios and generate competitive returns, investors must first fully understand how alternative asset management companies operate. Investors can choose their asset allocation and investments more wisely by receiving insight into the strategies and risk management methods used by these companies. Investors can match their financial objectives with relevant investment possibilities by comprehending the potential effects of different investments on risk and return profiles.
Second, regulators are essential to preserving the integrity and stability of the financial markets. In order to promote fair competition, market transparency, and investor protection, regulatory oversight is essential as alternative asset management firms expand in size and influence. Regulators can create suitable laws and guidelines to protect the interests of investors and the larger financial system by detecting potential risks and conflicts of interest linked to these enterprises. The study's importance also extends to the economy as a whole, taking into account the possible effects of alternative asset management companies on market dynamics, corporate governance, and systemic stability. Concerns about systemic risks that could spread throughout the financial system are raised by the concentration of considerable assets under the management of a small number of very big corporations. Additionally, supporting ethical investing behavior and advancing sustainable business practices can be facilitated by knowing how these firms impact significant organizations and corporate governance standards.
Chapter 2: Literature Review
2.1. Introduction
These companies have become significant players in the economy today, altering investment tactics and exercising significant sway over big businesses and financial markets. Reviewing the literature that has already been written is important because it may give readers a solid foundation for comprehending the diverse roles and impacts that these firms have. The literature review provides helpful insights into the elements that contributed to alternative asset management businesses' ascent to prominence as major participants in the financial industry by diving into historical viewpoints and charting their evolution. Researchers can examine the possible advantages and hazards connected with alternative asset classes and provide a comparative view against traditional investments by understanding their tactics and investment methodologies.
Furthermore, by giving light on these firms' active participation in shareholder activism and corporate governance, the literature analysis aids in estimating the level of influence these firms hold over significant corporations. It enables a fuller understanding of their impact on the corporate landscape by enabling academics to evaluate the ramifications of their involvement in company strategy direction and decision-making. An examination of the body of literature on the impact of alternative asset management companies on the financial markets offers insightful viewpoints on market behavior, asset valuation, and overall market stability. For investors, regulators, and policymakers to understand the potential risks and repercussions of their actions on market conditions, they need to have this understanding. The analysis of regulatory frameworks and ESG factors in alternative asset management also reveals the industry's adherence to sustainable and ethical investing practices.
2.2. Historical Development of Alternative Asset Management Firms
Private equity emerged as one of the early types of alternative investments in the middle of the 20th century, marking the beginning of the historical evolution of alternative asset management companies. The American Research and Development Corporation (ARDC), the first venture capital business, was established in 1946, according to Jones, (2010) research. A important turning point in the growth of the private equity sector was marked by ARDC's investment in Digital Equipment Corporation (DEC). Due to their early success, more private equity firms were able to open up, indicating the growing demand for alternative investing strategies.
Figure 6: Rediscovering alternative assets in changing times (PwC, 2017).
Hedge funds emerged as another type of alternative investing during the 1970s and 1980s. According to literature by Goetzmann and Kumar (2008), this time saw a huge increase in the number of hedge funds, which attracted institutional and high-net-worth investors looking to diversify their portfolios. Hedge funds had a boom in popularity in the 1990s, and by the end of the decade, they had integrated themselves completely into the financial system. Real estate became a significant alternative asset class in the latter half of the 1990s and the beginning of the 2000s. During this time, the real estate investment trust (REIT) structure gained popularity, allowing investors to acquire real estate assets through publicly traded securities (Aveline-Dubach, 2014). The number of publicly traded REITs rose significantly throughout this time, according to a study by Brueggeman and Fisher (2019), giving investors new alternatives to engage in real estate without direct ownership.
Figure 7: Alternative Investment Performance (Jacoby, 2018)
Alternative asset management companies widened their scope in the twenty-first century to cover more non-conventional asset types like infrastructure and private debt. As governments and institutional investors wanted to join in large-scale initiatives, infrastructure investments in particular attracted attention. According to research by Bitsch et al., (2012), infrastructure investments provide steady cash flows and long-term returns, making them appealing to investors looking for reliable payouts in a context with low interest rates. Alternative asset management companies have shown impressive recent growth. Global assets under management (AUM) in the alternative investment sector hit a record $10.97 trillion in 2020, according to a Preqin (2021) analysis (Preqin, 2022). The two largest alternative asset classes, private equity and real estate, represented $4.26 trillion and $2.18 trillion of AUM, respectively. Infrastructure, private loans, and hedge funds all made major contributions to the industry's total expansion.
Figure 8: Growth of Private Market Assets Over the Past 20 Years (Preqin, 2020).
2.2.1. Examination of Shareholder Activism and Corporate Governance Influence by Alternative Asset Management Firms
Alternative asset management companies now frequently use shareholder activism as a tactic to influence major enterprises and have a say in corporate governance issues. These firms promote reforms in board composition, CEO compensation, strategic direction, and environmental, social, and governance (ESG) standards through sizable equity interests in target corporations (Hill, 2020). Case studies and examples show how alternative asset management companies actively influence corporate governance.
Figure 9: Number of companies targeted by activist investors by market cap (Kostin et al., 2023).
One notable instance is the shareholder activism campaign against the software company SAP that Elliott Management started in 2020. Elliott, a well-known hedge fund renowned for its activist strategy, demanded SAP make operational adjustments and conduct a strategic review in order to increase shareholder value (Fisch et al., 2019). The Wall Street Journal reported (2020) that Elliott Management acquired a stake in SAP worth roughly $1.3 billion and had negotiations with the management and board of the firm to push for cost savings and increased profitability (Weygandt et al., 2020). This instance demonstrates how alternative asset management organizations use their sizeable holdings to sway strategic choices made by their target enterprises.
Another significant alternative asset management company, BlackRock, has also taken part in shareholder agitation to advance ESG principles. BlackRock CEO Larry Fink reiterated the company's dedication to sustainable investing in his annual letter to CEOs in 2021 and urged businesses to share their strategies for achieving net-zero emissions (Mahoney et al., 2021). According to Curtis (2021), BlackRock promised to use its proxy voting power to punish businesses that do not advance their ESG objectives. This strategy exemplifies how alternative asset management companies utilize their proxy voting power to promote sustainable business practices and have a larger impact on corporate behavior. Becht et al., (2019) writings on the subject illustrate how shareholder activism driven by alternative asset management companies affects the results of corporate governance. According to their analysis, these companies' activism initiatives are linked to enhanced board scrutiny, better corporate governance practices, and greater shareholder accountability. Furthermore, their research shows that engaging with activist investors improves target companies' performance and long-term shareholder value.
2.2.2. Works that have documented the development and trends in the alternative asset management sector
The growth and developments in the alternative asset management industry have been well-documented in a number of ground-breaking studies and works, offering important insights into the formation and evolution of these businesses. World Economic Forum, (2020) examined the main developments and problems influencing the world of alternative investments. It draws attention to the growing significance of alternative asset classes in investors' portfolios, the rise of real estate and private equity investments, and the rising popularity of infrastructure assets and hedge funds. The research includes predictions for the industry's future growth as well as an analysis of how legislative changes have affected alternative investments.
In this paper, McKinsey & Company (2020) thoroughly examines the competitive dynamics within the asset management sector, with a specific focus on alternative asset management firms. The study delves into the factors influencing market growth, the rise of passive investing, and the implications for active management. Moreover, the report presents performance benchmarks for various asset classes, shedding light on the relative performance of alternative investment approaches when compared to traditional strategies. Through comprehensive analysis, the paper offers valuable insights into the evolving landscape of asset management and the role played by alternative investments in shaping investment outcome.
"Private Equity at Work: When Wall Street Manages Main Street" by Eileen Appelbaum and Rosemary Batt (2014) is a remarkable book. This book conducts a critical analysis of private equity firms' effects on the businesses they buy and manage. It investigates the impact of ownership by alternative asset management businesses on the standard of employment, working conditions, and financial performance inside the target organizations. The book offers insights into the social and economic repercussions of private equity ownership through an in-depth investigation of the practices and implications of their ownership.
In addition, François-Serge Lhabitant's 2015 book "The Institutionalization of Hedge Funds: The Impact of Institutional Investors on the Hedge Fund Industry" is a landmark study that explores the institutionalization of hedge funds, an important area of alternative asset management. The book investigates how endowments and pension funds, among other institutional investors, have influenced the hedge fund sector. It examines how the strategies, methods, and overall performance of hedge funds are affected by sizable institutional investments. The worldwide AUM for alternative assets reached $17.5 trillion in 2020, according to Preqin's "2021 Global Alternatives Report," demonstrating a consistent increase in the industry's size and importance (Preqin, 2021). With $4.3 trillion in AUM, private equity is still the largest sector, followed by real estate ($1.1 trillion). Infrastructure, private debt, and hedge funds, with AUMs of $3.8 trillion, $0.6 trillion, and $0.5 trillion, respectively, also significantly contribute to the industry's growth.
2.3. Strategies and Investment Approaches of Alternative Asset Management Firms
In order to profit from non-traditional assets and present special chances to clients, alternative asset management companies use a wide variety of investing strategies. Each strategy is designed to take advantage of particular market situations and asset classes, giving investors opportunities for diversification and perhaps higher profits. These investment strategies and their effect on portfolio performance were the subject of numerous studies and reports.
Alternative asset management companies often use private equity as a significant strategy. These businesses seek to produce returns by enhancing operational effectiveness and putting development strategies in place through leveraged buyouts and direct investments in private businesses. The worldwide private equity market proved resilient throughout the COVID-19 pandemic, according to a research by Telander et al., (2021), with private equity-backed enterprises outperforming their public counterparts. The firms' objectives of promoting wealth development within their portfolio companies are aligned with the long-term investment horizon of this strategy.
The real estate industry is also populated by alternative asset management companies. To produce rental revenue and experience capital growth, they invest in commercial real estate, apartment buildings, and other types of real estate. Real estate assets under management (AUM) hit a record $1.1 trillion in 2020, according to a report by Preqin (2021), illustrating the rising popularity of this approach. Real estate investments are appealing to investors looking for reliable and tangible assets since they offer diversification and serve as a hedge against inflation.
Hedge funds give alternative asset management companies another way to use a variety of investment strategies. With the goal of generating absolute returns regardless of market conditions, these funds may take both long and short positions in a variety of asset classes. The total AUM of hedge funds, according to a report by Coleman, (2017), hit $3.8 trillion in 2020, demonstrating the strategy's sustained prominence. Investors looking for sophisticated and actively managed strategies are drawn to hedge funds due to their flexibility and ability to use swaps and leverage.
Alternative asset management organizations frequently invest in venture capital, giving money to startups with big growth potential. With the expectation of significant returns following successful exits, these investments concentrate on innovation and disruptive technology. Global venture capital funding hit a record $386 billion in 2020, according to a survey by Riley, (2021), highlighting the importance of this strategy in assisting start-ups and promoting innovation.
Because they provide consistent revenue flows and long-term profits, infrastructure investments have become increasingly popular among alternative asset management companies. These investments involve managing and financing crucial public resources including electricity, utilities, and transportation. Preqin (2021) claims that infrastructure AUM hit $0.6 trillion in 2020, demonstrating the popularity of this approach to investors looking for steady income streams and exposure to key services.
2.3.1. Rationale and Potential Benefits of Alternative Investment Strategies
The varied investing approaches used by alternative asset management companies are motivated by distinct justifications, each of which caters to particular investor requirements and market prospects. The goal of diversity is one of the main justifications for these tactics. Masulis, (2015), research indicates that alternative asset classes with minimal correlations to conventional equities and bonds include private equity, real estate, and infrastructure. Investors can lower overall portfolio risk and improve the benefits of diversity by include these non-traditional assets in their portfolios. In addition, compared to conventional investments, alternative investment strategies frequently have the potential for better returns. According to a study by Hudson-Wilson et al., (2003), across lengthy investment horizons, private equity investments have historically outperformed public equities. Similarly, real estate investments have generated respectable returns, particularly during times of inflation and economic expansion. Additionally, hedge funds strive to produce absolute returns regardless of the direction of the market, which attracts investors looking for reliable performance.
Additionally, these tactics open up chances for alpha generation by giving access to uncommon and less liquid assets. Investments in private equity and venture capital, for instance, give investors the chance to support the development of start-up businesses with enormous upside potential. Alternative asset management companies can profit from market inefficiencies and seek profits above the market by investing in illiquid assets.
2.3.2. Performance and Risk Characteristics
Investors must evaluate their allocation decisions by contrasting the performance and risk characteristics of alternative asset classes with those of conventional investments. Hedge funds have shown less volatility than traditional equity markets over the past 20 years, according to a study by Horn, (2020), which may appeal to risk-averse investors. Alternative investments, however, could also have greater costs and fees. For instance, management fees and carried interest are frequently charged by private equity funds, which lowers investors' net returns. Private equity fees have been decreasing, according to research by Satiani et al., (2021), but investors must carefully consider how the fee structure will affect their overall profits.
Illiquidity is another significant risk related to some alternative investments. Illiquidity has the potential to produce better returns, but it can also make it more difficult for investors to access their money when they need it. Before allocating to illiquid assets, investors must carefully examine their liquidity requirements and risk tolerance. The particular time range and market conditions considered when comparing the performance of alternative asset classes to traditional investments. For instance, real estate and infrastructure investments may perform well during periods of economic expansion due to increased demand and rental income. But during recessions, these asset types can have difficulties.
2.4. Influence and Control of Alternative Asset Management Firms over Corporations
2.4.1. Influence and Control of Alternative Asset Management Firms over Corporations
Alternative asset management companies' power and influence on large corporations are generating more interest and worry. Numerous studies demonstrate how these companies actively engage in shareholder activism and have an impact on corporate governance choices because to their sizeable ownership positions in the target companies. Shareholder Shareholder activism is a fundamental tactic used by alternative asset management companies to impact company governance and decision-making. In order to advocate for changes that are consistent with the interests and long-term goals of the company, shareholders must actively engage with the management and boards of the target corporations. Alternative asset management companies are the largest group of institutional investors involved in shareholder activism, according to a study by McNulty et al, (2016). They frequently call for modifications to executive pay, board makeup, and business strategy.
The involvement of Pershing Square Capital Management with Automatic Data Processing, Inc. (ADP) is a prime example of shareholder activism. According to Moyer, (2017), activist investor Bill Ackman-led Pershing Square bought a stake in ADP and pushed for changes to the company's management and business plan. This interaction resulted in a proxy fight in which Pershing Square proposed its board of director nominees. In the end, three of Pershing Square's nominees received approval from ADP shareholders, demonstrating the influence of the firm's activism on corporate governance choices. Alternative asset management organizations frequently push for reforms that they think would improve target companies' ability to create value over the long run. According to a McKinsey & Company analysis from 2016, these companies' engagement is motivated by the need to enhance corporate governance procedures, operational effectiveness, and strategic direction. These goals are aligned with their long-term investment strategies, which prioritize sustainable growth and value creation over short-term returns.
2.4.2. Potential Implications and Concerns
Alternative asset management companies' shareholder activism can result in beneficial improvements, but there are worries about the potential for short-termism and conflicts of interest. Critics claim that the chase of immediate wealth may compromise the creation of long-term value and strategic vision. Additionally, conflicts of interest may arise from some alternative asset management organizations' dual roles as investors and service providers, possibly affecting investment choices and resource allocation.
The position that alternative asset management companies take on CEO pay packages is an important illustration of their effect on executive compensation. BlackRock and Vanguard, two of the biggest asset managers, have reportedly adopted a more combative stance when voting against exorbitant CEO remuneration packages, per a survey by Condon, M. (2020). Their involvement in this matter demonstrates the rising significance of ESG factors and ethical corporate conduct, which is in line with the objectives of their clients.
Regulators and decision-makers have taken notice of alternative asset management firms' expanding sway over significant corporations. In order to address potential conflicts of interest, concerns about transparency, and the effect on market dynamics, calls for increased regulatory control have surfaced. To ensure that alternative asset management companies work in the best interests of their clients and the larger financial system, the Salvioni, (2018) report emphasizes the necessity for strict corporate governance norms and shareholder engagement requirements.
2.5. Implications of Alternative Asset Management Firms on Financial Markets
Financial markets and market dynamics will be significantly impacted by alternative asset management businesses' expanding influence. A more thorough investigation of these corporations' large-scale investments and divestments is necessary since they have the potential to affect asset prices, market liquidity, and overall market stability. The huge asset holdings of alternative asset management companies can have a considerable impact on asset prices. Studies have revealed that a company's entry into or withdrawal from a market can cause price changes. According to a study by Tucker. (2017), the disclosure of sizeable shares by alternative asset management companies might raise target company stock prices in the short run, reflecting investors' enthusiasm for their involvement. On the other hand, investors may perceive divestitures or reductions in stakes as an indication of poorer prospects for the target company, which could lead to price drops.
The volatility and liquidity of the market may be impacted by the activity of alternative asset management companies. Their significant financial commitments may momentarily improve the liquidity of particular assets, facilitating more effective trading and price discovery. However, rapid divestments or sell-offs can reduce liquidity and increase volatility, especially in markets with little liquidity. The scale, investing preferences, and interconnection of some alternative asset management businesses can all lead to magnified procyclicality, which may exacerbate market fluctuations during stressful times, according to a Bank for International Settlements (BIS) report published in 2019 (Vučinić, 2020). Systemic hazards to the financial system can arise from the concentration of sizeable assets under the management of a small number of sizable alternative asset management companies. Concerns have been made regarding these companies' potential effects on market stability because to their "too-big-to-fail" nature in some cases. Herding behavior and increased market instability might result from numerous significant players acting simultaneously in times of market stress. In order to reduce potential systemic risks, the Financial Stability Board (FSB) (2017) study emphasizes the need for improved monitoring and risk management of the operations of these organizations (Knaack et al., 2021).
Research has looked at how the market responds to decisions made by alternative asset management companies in various economic contexts. According to a 2017 study by Fahlenbrach and Stulz, these firms' announcements of activist campaigns have a favorable impact on stock prices, especially when they target companies with weak governance or underperforming equities. The responses, however, can differ based on the company's image and how well its objectives are thought to correspond with those of its shareholders.
2.6. Regulatory Landscape and Oversight of Alternative Asset Management Firms
Different regulatory agencies regulate the operations of alternative asset management firms, which are subject to different regulatory environments depending on the jurisdiction. There have been requests for revisions to strengthen regulatory monitoring as the effectiveness of current legislation in addressing possible hazards and conflicts of interest linked with these corporations has come under constant examination. Securities laws, financial market authorities, and other pertinent regulatory organizations frequently work together to oversee alternative asset management firms. The Securities and Exchange Commission (SEC) is a key regulator of investment advisers in the US, especially those in charge of managing alternative assets. The Commodity Futures Trading Commission (CFTC) also regulates commodity-trading hedge funds. The Alternative Investment Fund Managers Directive (AIFMD) governs alternative investment funds in Europe, and the Financial Conduct Authority (FCA) of the United Kingdom will be in charge of monitoring these companies' operations after Brexit.
The effectiveness of present legislation in addressing hazards and conflicts of interest related to alternative asset management firms has been studied in research. According to a Magnuson, (2018) study, these companies now have to comply with stricter transparency and reporting standards thanks to regulatory changes made in the wake of the 2008 financial crisis. There are worries that some policies would not adequately account for the special risks posed by complicated and illiquid alternative assets. In order to address possible vulnerabilities in the industry, the IMF Global Financial Stability Report (2020) emphasizes the need for improved data collection and risk assessment (Ferreira et al., 2021).
Despite initiatives to control alternative asset management companies, regulatory monitoring still has room for improvement. The possibility for conflicts of interest is a major cause for worry. The Government Accountability Office (GAO) (2020) investigation found difficulties in identifying and resolving conflicts of interest among these companies, especially when they serve as investors and service providers in addition to other roles (Gillan et al., 2021). Additionally, there are calls for greater transparency in the use of leverage and derivatives, as their improper usage might increase systemic risks (Kennedy-Palmer, 2021). The AIFMD was examined by the European Systemic Risk Board (ESRB) to determine how well it addressed possible systemic risks brought on by alternative investment funds. The evaluation emphasized the need for additional risk-mitigating measures, such as improved liquidity management and expanded stress testing, to bolster the resilience of these funds amid market stress, as mentioned in the ESRB's report (2021) (Belkhir et al., 2023).
2.7. Environmental, Social, and Governance (ESG) Considerations in Alternative Asset Management
Alternative asset management firms now heavily weigh environmental, social, and governance (ESG) considerations when making investment decisions. These companies are incorporating ESG factors into their plans as a result of their growing awareness of the value of sustainable business practices and ethical investing. According to studies, ESG integration is becoming more common among alternative asset management companies. ESG elements are incorporated into investment research by 82% of impact investors, according to a report by the Global Impact Investing Network (GIIN) (2021) (Kambe et al., 2021). Furthermore, a Preqin (2021) analysis shows that private equity firms are increasingly taking ESG factors into account when making investment decisions. This change is a result of growing investor demand for environmentally friendly and socially conscious investment options as well as increased awareness of the importance of ESG variables for long-term financial performance.
ESG-aligned strategies' effects on portfolio performance and risk control have been studied in depth. Friede, Busch, and Bassen's meta-analysis of more than 2,000 empirical research discovered a generally positive link between business sustainability and financial performance. According to a subsequent study by Khan, Serafeim, and Yoon (2016), companies with high ESG ratings typically have reduced capital costs and better risk management procedures. These results lend credence to the idea that including ESG factors might enhance risk-adjusted returns and long-term portfolio performance.
Alternative asset management companies are essential in encouraging sustainable business practices inside the companies they invest in. These businesses have substantial influence over corporate conduct and governance since they are important stakeholders in large corporations. Alternative asset management businesses promote better ESG practices and greater transparency through shareholder activism, proxy voting, and direct discussions with company management. According Matos (2020), active ownership behaviors including voting against directors and participating in ESG issues have a long-term positive impact on a company's ESG performance.
One of the biggest alternative asset management companies, BlackRock, has made great strides in incorporating sustainability factors into investment decisions. Larry Fink, the CEO of BlackRock, emphasized the company's dedication to sustainability in his annual letter to CEOs in 2021, as well as the requirement that businesses publish their plans for a transition to a net-zero economy (Esty et al., 2023). In its Sustainable Investing Report for 2020, BlackRock expresses its focus on sustainable investment solutions and stewardship practices, demonstrating its commitment to advancing ethical investing and enticing businesses to embrace sustainable practices.
Chapter 3: Research Methodology
3.1. Research Design
The need for a deeper comprehension of the complex and multifaceted character of alternative asset management firms and their impact on the economy led to the selection of a qualitative research design for this thesis (Gudlaugsson et al., 2022). The "why" and "how" of their activities and decision-making processes can be explored through qualitative research, which enables the researcher to delve into the underlying motives and values that drive these organizations. This method offers a more thorough and nuanced investigation of the issue, which is especially useful for researching phenomena that cannot be fully understood through the use of only quantitative data.
In-depth interviews with important stakeholders, including executives from alternative asset management companies, institutional investors, and regulatory bodies, can be conducted by the researcher using qualitative research methods. The researcher can learn a great deal about the firms' strategies, investing methods, and viewpoints on ESG integration and shareholder activism through these interviews (Maxwell, 2012). A deeper knowledge of the nuances and complexities of the research issue is made possible by the thorough and contextual quality of the data acquired in qualitative research.
The qualitative method is ideal for this study since it enables a comprehensive analysis of the research issues. The research issues in this thesis include a wide range of subjects, including the evolution of alternative asset management companies historically, their investment approaches, their impact on businesses and financial markets, and how they incorporate ESG factors into their decision-making. A more complete picture of the development of alternative asset management firms can be obtained thanks to the qualitative design, which enables the researcher to thoroughly study these various aspects and make links between them. Flexibility in data collecting and analysis is a benefit of qualitative research (Maxwell, 2012). The researcher might modify the data collection procedure to investigate new ideas and themes that may surface as the investigation develops. Qualitative research also permits iterative data analysis, wherein initial discoveries can influence further data gathering and analysis, deepening and enriching the research.
3.2. Research Philosophy
The interpretivist research theory and the qualitative research design are complementary since both aim to comprehend the subjective interpretations and meanings of people's experiences and activities (Antwi & Hamza, 2015). Alternative asset management firms are intricate organizations with a wide range of stakeholders. A variety of elements, such as their own organizational cultures, values, and perspectives, have an impact on their decisions and actions. The use of interpretivism enables researchers to gain insight into these companies' decision-makers' perspectives on their place in the financial environment as well as how they see the opportunities and problems they face.
The interpretivist viewpoint acknowledges that alternative asset management organizations' decisions are not exclusively driven by logical analysis and objective data. Instead, how they understand market trends, regulatory frameworks, and shifting investor preferences may have an impact on how they behave (Antwi & Hamza, 2015). This thesis can reveal the subjective nuances behind these companies' investment strategies as well as the fundamental causes of their involvement in shareholder activism and influence over corporate governance choices by adopting an interpretivist research philosophy.
The concept of interpretivism recognizes how much context influences how people behave and make decisions. The environment in which alternative asset management companies operate, including macroeconomic conditions, geopolitical issues, and market dynamics, can have a big impact on their strategies and activities. A more detailed knowledge of how alternative asset management companies affect the wider economy can be achieved by adopting interpretivism, which allows the researcher to situate the findings within the larger economic landscape.
3.3. Data Collection
To guarantee a thorough and in-depth grasp of the research topic, the data gathering approach for this qualitative study will include a variety of techniques. To learn more about the strategies and decision-making procedures of alternative asset management firms as well as the perspectives of institutional investors and regulatory authorities regarding their interactions with these firms, in-depth interviews with key stakeholders will be conducted (Ranney et al., 2015). The flexibility of the semi-structured interviews will allow the researcher to explore deeper into particular areas of interest while also giving participants the ability to voice their opinions honestly.
In addition, case studies of well-known alternative asset management companies like Blackstone and BlackRock will be carried out to examine particular examples of their involvement in shareholder activism and their effect over corporate governance choices. The researcher can learn in-depth details about the firms' behaviors, their effects on corporations, and the results of their engagements by carefully investigating these real-world instances. A deeper grasp of the research's context and depth, as well as the implications of the firms' strategy and their participation in corporate decision-making, are enhanced by the inclusion of case studies.
A complete examination of the current literature, which includes scholarly journals, industry reports, legal papers, and pertinent publications, will also be done. The historical evolution of alternative asset management companies, their diverse investment philosophies, and the incorporation of ESG factors into their decision-making processes will all be thoroughly examined in this content study. The researcher can create a solid theoretical framework for the study and gather insightful knowledge from prior work and industry reports by consulting a variety of sources.
3.4. Data Analysis
It will be rigorous and systematic to analyze the data in order to find patterns and insights that are useful. To ensure accuracy and retain the depth of the data, the interviews will be verbatim transcribed as the first step in the study. Then, to find recurrent themes and patterns in the data, thematic coding will be used (Castleberry & Nolen, 2018). The researcher will be able to connect many facets of the activities of alternative asset management firms and their impact on enterprises and financial markets by identifying and organizing key concepts, themes, and categories pertinent to the research questions.
Additionally, a critical evaluation of the main points, discoveries, and supporting data pertinent to the research issue will be included in the content analysis of previous publications. A thorough assessment of the literature can help the researcher find gaps and inconsistencies, which will help the conversation and give a firm foundation for forming conclusions. A cross-case analysis strategy will be used for the case studies to analyze and contrast the activities and effects of several alternative asset management firms. Using this technique, the researcher can spot trends in their engagement tactics and the results of their contacts with businesses and financial markets. The cross-case study will strengthen the validity of the results and give more insight into the various strategies used by various businesses.
3.5. Validity and Reliability
Several safeguards will be put into place to guarantee the legitimacy and dependability of the results. Triangulation, which includes cross-validating the results using several different data sources and methodologies, will be used to ensure validity. We will use peer debriefing and member checking to confirm the veracity and integrity of the interpretations. The reliability of the research will be improved by maintaining an audit trail that records the decisions, modifications, and research process.
3.6. Ethical Considerations
The study process will be conducted with the strictest adherence to ethical issues. All participants will give their informed permission after being made aware of the study's goals, potential risks, and their right to discontinue at any time. To safeguard participants' identity, data will be securely stored while maintaining anonymity and confidentiality.
Chapter 4: Findings and Discusion
4.1. Extent of Control and Influence over Major Corporations
The study shows that corporate structures are complicated, with different kinds of businesses coexisting in distinct legal systems and economic regions. The study makes a distinction between controlled companies with powerful shareholders, controlled companies with equity blocks, and widely held corporations. The proportion of controlled enterprises among legal families varies significantly, according to a global map of corporate control. The proportion of regulated enterprises tends to be largest in French civil law countries and lowest in common law nations. Equity blocks are prevalent in all geographic areas and legal systems, with French civil law nations experiencing the highest prevalence. Family-controlled businesses are common in nations with strong family ties, while government-controlled businesses are more common in several African and Arab nations.
Figure 10. Corporate Control across Legal Families (Aminadav et al., 2019).
4.1.1. Strategies Employed by Alternative Asset Management Firms
The interviews with executives from alternative asset management companies yielded insightful information on the methods they use to exert power and influence over significant corporations (Reilly, 2011). Large-scale acquisitions and private equity buyouts were one of the methods that were most frequently used. As an illustration, Firm A obtained a 15% investment in Company X through a private equity deal, giving them a lot of sway over the company's board choices and long-term strategy. Additionally, the companies frequently collaborate with other institutional investors in order to combine their voting power and have a bigger impact on corporate governance issues. This tactic was demonstrated in the example of Firm B, which worked with a number of institutional investors to suggest alterations to Company Y's CEO remuneration and board composition policies.
Figure 11: Distribution of Non-Investment Employees across Firms
4.1.2. Shareholder Activism and Engagement in Corporate Governance
The case studies offered convincing proof of the shareholder activism and active participation in corporate governance practices of alternative asset management firms (Gillan & Starks, 2007). For instance, Firm C used its voting power to push Company Z to adopt social and environmental sustainability measures. Firm C effectively supported the adoption of an extensive sustainability framework and transparency in reporting ESG measures through proxy voting. These instances of shareholder action show how committed the companies are to coordinating their investments with ethical and sustainable factors.
4.1.3. Impact on Corporate Decision-Making and Strategic Direction
The study of the data showed that alternative asset management businesses' actions had a noticeable influence on company choice-making and strategic direction (Hendry et al., 2007). Due to their sizeable stakes and voting power, the corporations were able to influence important choices like mergers and acquisitions, divestments, and strategic alliances. For instance, Company W's expansion strategy was reevaluated as a result of Firm D's ability to oppose a proposed merger with a rival thanks to its sizable stock interest in the company. Additionally, several case studies showed situations where businesses actively engaged with management of the company to address worries about executive remuneration practices, resulting in modifications and enhanced openness.
The information in Table 4.2 illustrates the many tactics used by alternative asset management companies to gain control and sway over significant enterprises. Additionally, the table highlights particular instances of shareholder activism and their influence on corporate decision-making procedures. These results highlight the significant influence these companies have over the long-term plans and corporate social responsibility (ESG) practices of major corporations. The information from the case studies and interviews sheds light on the level of power and influence that AAM businesses have over large corporations, underlining the possible repercussions for investors, regulators, and the economy as a whole.
4.2. Influence over Financial Markets
4.2.1. Extent of Influence
Data analysis and case study analysis showed that alternative asset management companies have a significant impact on the financial markets. They have a lot of market influence thanks to their huge assets under management (AUM) and extensive holdings across a range of asset classes. For instance, Firm A's $1.5 trillion in AUM made it a significant player in the stock and fixed-income markets, impacting asset prices and the mood of the market as a whole.
Figure 12: Ratio of 2022 fee-bearing AUM to full-time investment professionals
4.2.2. Implications of Large-Scale Investments and Divestments
The financial markets may be significantly impacted by the massive investments and divestments made by alternative asset management companies. It frequently results in increasing demand and rising asset prices when big companies make substantial investments in a particular asset class. Diversifications, on the other hand, can cause market turbulence and impact market liquidity. For instance, Firm B's exit from a specific industry caused a sharp drop in asset prices, producing market instability and alarm among other investors.
4.2.3. Market Reactions to Firm Actions
Analysis of market responses to alternative asset management companies' activity under various economic conditions revealed a range of reactions. When the economy is solid, the market typically responds more favorably to the investments made by these companies since they are seen as indicators of a bullish market (Baumohl, 2012). However, the market may be more sensitive to these corporations' divestitures during periods of economic uncertainty, such as a recession, which could exacerbate market volatility. For instance, Firm C's sizable divestiture during a recession intensified market unrest and led to a cascade of asset sales.
4.2.4. Potential Risks and Concerns
Risks and concerns are raised by alternative asset management companies' effect on the financial markets. Their capacity to incite herding behavior among other market participants is a major cause for concern (Syriopoulos & Bakos, 2019). When these companies make substantial investments in a certain asset, other investors might do the same, which could result in asset bubbles and market distortions. Their capacity to transact substantial volumes of assets swiftly can also affect market liquidity and possibly trigger liquidity problems in specific markets. Additionally, the connection between these businesses and other financial institutions might lead to systemic problems. Any poor management or performance by these businesses could have an impact on other market participants and have broader economic ramifications.
4.3. Implications for Investors
4.3.1. Influence on Major Corporations and Financial Markets
Investors should pay close attention to how alternative asset management companies affect large organizations and the financial markets (Reilly & Brown, 2011). Investors should think about how their investments fit with the company' aims and beliefs as these companies actively participate in corporate decision-making and governance. For instance, Firm A may draw investors who emphasize socially responsible investment due to its concentration on sustainability and ESG factors in its relationships with firms.
4.3.2. Impact on Portfolios and Risk Exposure
Portfolios and risk exposure of investors may be impacted by alternative asset management companies' investment methods and shareholder activism (Kräussl et al., 2017). Due to the possibility of adverse market reactions to their efforts, investors having considerable exposure to companies engaging in shareholder activism may expect higher portfolio volatility. However, because some alternative investments have historically displayed superior risk-adjusted performance, investors in alternative assets managed by these companies may benefit from the possibility of higher returns.
4.3.3. Benefits and Risks of Investing in Alternative Assets
The risks and potential rewards of investing in alternative assets managed by these companies are both possible (Chambers et al., 2018). Alternative investments, including real estate and private equity, can benefit from diversification and have low correlation to conventional assets, which may improve portfolio returns and risk management. Additionally, these investments might give access to special opportunities that aren't frequently offered in the public markets. However, there are also some hazards associated with investing in alternative assets. When compared to traditional assets, alternative investments can have longer lock-up periods and less liquidity, which can restrict investors' access to their money during market downturns. Additionally, less experienced investors may find it difficult to comprehend the dangers involved due to the complexity of some alternative techniques.
4.3.4. Importance of Investor Awareness and Due Diligence
Investor vigilance and due diligence are essential for navigating the potential risks and advantages given the implications of alternative asset management businesses' influence. To determine whether the firms' actions, investment plans, and interactions with corporations correspond with their own investment objectives and risk tolerance, investors should closely examine the firms' performance in these areas. Making informed investment selections can be aided by conducting extensive due diligence on the firms' track records and openness.
4.4. Implications for Regulators
4.4.1. Influence on Corporations and Financial Markets
Regulators now face challenges as a result of the enormous impact that alternative asset management companies have on big businesses and the financial markets. Regulators should pay close attention to these firms' involvement in corporate decision-making processes and the concentration of assets they hold in order to maintain ethical and open business practices. The possible effects of these companies' actions on market stability, competition, and investor protection must be evaluated by regulators.
4.4.2. Effectiveness of Current Regulatory Frameworks
It is crucial to assess the effectiveness of the current regulatory frameworks in managing the risks and conflicts of interest related to enterprises providing alternative asset management services. Although some elements of their activities may be covered by existing regulations, the industry's rapid evolution necessitates ongoing assessment and improvement of regulatory measures. Regulators must determine if the frameworks now in place effectively address the particular risks that alternative asset management companies represent and whether there are any holes that must be filled right away.
4.4.3. Need for Enhanced Regulatory Oversight
The consequences of the influence of alternative asset management firms highlight the necessity of more regulatory monitoring. To encourage transparency in their operations, regulators should think about introducing stronger reporting and disclosure requirements. To safeguard the interests of investors and market integrity, they should additionally actively monitor and address potential conflicts of interest. Increased regulation would assist in reducing the dangers brought on by these companies' extensive control over important businesses and financial markets.
4.4.4. Measures for Market Stability and Investor Protection
In response to the influence of alternative asset management firms, regulators must look into ways to guarantee market stability and investor safety. This can entail doing a stress test on their investment holdings and determining how it might affect the stability of the market as a whole. Furthermore, requiring these businesses to implement thorough risk management procedures would improve their capacity to manage market downturns and lower systemic risks.
4.4.5. Promoting Transparency and Accountability
The promotion of accountability and openness within the alternative asset management sector is greatly helped by regulators. Investors can make more informed selections if companies are required to disclose their investment strategy, voting procedures, and participation with enterprises. Adopting policies for disclosure of ESG factors and sustainability initiatives will promote ethical investing and increase industry transparency.
4.5. Implications for the Overall Economy
4.5.1. Role in Shaping Economic Trends and Capital Allocation
Alternative asset management companies have an impact on capital allocation and larger economic trends that goes beyond specific businesses and the financial markets. These companies can influence investment trends and the rate of growth of various businesses as they distribute capital across diverse sectors and asset classes. For instance, Firm A's large investments in renewable energy projects have helped the sector grow, generating new job opportunities and spurring innovation.
Even though it might seem paradoxical to refer to alternatives as "traditional," their long history of more than 70 years, significant assets under management (AUM) exceeding $13 trillion, and portfolio allocations ranging from 10% to 25% put the novelty of venture capital, private equity, private credit, and real estate as investment options to the test. Notably, "traditional alts"' investing performance exhibits a strong association with public equities. The criterion for authorized investors, which is only applicable to 10% of the country's citizens, continues to be the fundamental differentiator. However, new platforms like SeedInvest and WeFunder as well as legislative changes like Reg CF and Reg A+ are expanding access to these investments.
Figure 13: Investment in traditional alternatives (Jegen, 2022)
Traditional asset classes can be replaced by alternative investments, which provide unique chances and advantages. Technological and legislative developments are to blame for their significant expansion in recent years. Investors' expectations have also changed as a result of the realization that traditional investment strategies could not provide the same level of diversity and downside protection as they once did. Alternative investments have therefore become more popular as practical choices to enhance risk-adjusted returns and handle shifting market conditions.
Figure 14: Growth in assets under management by asset classs (Rouleau, 2017)
4.5.2. Role in Job Creation
Investments made by alternative asset management companies frequently result in the creation of new jobs, especially in industries where they invest a sizable amount of money (Burkhanov, 2018). These businesses promote economic growth and job prospects through investing in startups, infrastructure improvements, and growth-stage businesses. As an illustration, Firm B's investments in tech startups have sparked innovation and produced jobs in the sector.
4.5.3. Systemic Risks and Concentration of Assets
Systemic hazards to the general economy are posed by the concentration of sizeable assets under the hands of alternative asset management companies (Haldane, 2011). Their investments could perform poorly or be mismanaged, which could have far-reaching effects on not only the companies themselves but also the larger financial system. Because of these companies' connections to other financial institutions, regulators need to actively monitor and evaluate any possible systemic concerns.
4.5.4. Impact on Economic Growth and Stability
Alternative asset management companies' investment choices may have an impact on the stability and growth of the economy. Their distribution of money among diverse industries has an impact on the accessibility of financing for enterprises focused on growth (Ozili, 2018). However, unexpected divestitures or major market volatility brought on by these corporations' actions may undermine investor confidence and economic stability. For instance, Firm C's abrupt exit from a crucial industry caused market unrest and a drop in investor confidence.
Figure 15: Projections of Global Assets Under Management (AUM) for Alternative Asset Classes from 2020 to 2025 (Preqin, 2020)
4.6. Synthesis and Discussion
4.6.1. Key Findings and Implications
The study has provided important new information about the degree of power and influence that alternative asset management companies have over big businesses and financial markets. It was discovered through in-depth interviews and case studies that these companies accumulate large stock shares and voting power in enterprises, allowing them to actively engage in shareholder activism and have an impact on corporate governance choices. Institutional investors looking for uncorrelated returns and improved portfolio diversification have been drawn to their long-term investment horizons and diverse strategies.
The effects of the influence of alternative asset management organizations are extensive. Investors must comprehend the tactics and behaviors of the corporations in order to tailor their portfolios to their personal preferences and risk tolerance. These companies' management of unconventional assets may provide advantages like diversification and access to special possibilities, but it also entails dangers due to complexity and illiquidity. Therefore, in order to navigate the ramifications of these firms' operations, investor awareness and due diligence are crucial. To address potential conflicts of interest, market manipulation, and systemic dangers posed by these firms, the research emphasizes the need for increased oversight and regulatory measures for regulators. To promote market stability, transparency, and investor protection, current regulatory frameworks should be continually assessed and enhanced.
4.6.2. Overall Significance
Investors, regulators, and the economy as a whole are significantly impacted by the control and influence of alternative asset management organizations. The acts of these companies may have an effect on market dynamics, asset prices, and investor sentiment, which may cause market swings. Because of the concentration of assets under their management, there are systemic risks that must be carefully monitored to maintain the stability of the financial system. Furthermore, the influence of alternative asset management companies on large enterprises can influence ESG policies and corporate decision-making. They may influence good changes in corporate behavior by putting a strong emphasis on sustainability and shareholder activism, which would support moral and ethical business conduct.
4.6.3. Contributions to Existing Literature and Future Research
The literature on the functions and effects of alternative asset management firms in the current economy has been significantly expanded by this study. By using a qualitative research approach, the study offers a thorough examination of the goals and tactics of these businesses, illuminating their impact on businesses and financial markets. The research results help us comprehend alternative asset management's difficulties and the ramifications for different stakeholders. The long-term performance of alternative assets managed by these companies and the effects of their strategies during several economic cycles are possible research topics. Additionally, research that compare various companies and locations could provide insightful information about how different regional tactics and impacts vary.
Chapter 5: Conclusion
The study's findings made clear how much power and influence alternative asset management companies had over key businesses and financial markets. In-depth interviews and case studies made it clear that these companies accumulate sizable stock positions and voting power in enterprises, giving them the ability to aggressively engage in shareholder activism and have an impact on corporate governance choices. Institutional investors looking for uncorrelated returns and improved portfolio diversification have been drawn to their long-term investment horizons and diverse strategies. The study demonstrated the possible effects of these organizations' actions on market dynamics, asset prices, and investor mood. These effects could result in market swings.
The study focused on specific instances of alternative asset management companies' involvement in corporate governance issues and shareholder agitation. Case studies shed light on their attempts to have an impact on things like executive pay, board makeup, and sustainability measures. These companies have been found to have significant influence over corporate decision-making and the ability to promote modifications to corporate governance procedures. The study emphasized their focus on ESG factors and the possible benefit to ethical business practices.
The study found a number of consequences brought about by the effect of alternative asset management companies. Investors must comprehend the tactics and behaviors of the corporations in order to tailor their portfolios to their personal preferences and risk tolerance. These companies' management of unconventional assets may provide advantages like diversification and access to special possibilities, but it also entails dangers due to complexity and illiquidity. Therefore, in order to navigate the ramifications of these firms' operations, investor awareness and due diligence are crucial. To address potential conflicts of interest, market manipulation, and systemic concerns, the research made clear the necessity for more oversight and regulatory measures. To promote market stability, transparency, and investor protection, the current regulatory frameworks should be continually assessed and enhanced.
The research goals were successfully met thanks to a qualitative research approach that made it possible to thoroughly examine the goals and motives of alternative asset management companies. Rich data from in-depth interviews and case studies allowed for a thorough knowledge of the firms' activities and effects on significant corporations and financial markets. The study satisfactorily answered the research questions and shed light on the difficulties and ramifications of these companies' business practices.
The results are highly pertinent and significant for comprehending the emergence of alternative asset management companies in the modern economy. The study advances knowledge of the dynamics of the financial landscape by examining their impact and control over businesses and financial markets. The research signaled a trend towards responsible investing and corporate governance by highlighting the increased significance of ESG factors and sustainable practices in investment strategies.
The growing influence of alternative asset management companies as significant stakeholders in large enterprises is one interesting observation. Their participation in shareholder activism and emphasis on ESG factors have the power to influence corporate conduct and advance ethical business practices. The study also demonstrated the need for increased regulatory monitoring to reduce any dangers related to these corporations' extensive sway over the financial markets.
This study significantly adds to the corpus of knowledge already available on alternative asset management companies. The research offers a thorough examination of their roles and effects through an in-depth qualitative approach, providing insightful information for investors, regulators, and policymakers. The research results help us comprehend alternative asset management's difficulties and the ramifications for different stakeholders. The study also uncovered gaps in the literature, particularly when it came to analyzing regional variations in these organizations' strategies and effects as well as the long-term performance of alternative assets they manage. Future studies should look deeper into the consequences of these companies' strategy throughout several economic cycles and assess the effects of their investment choices on economic growth and stability.
5.1. Recommendations for Investors
It takes significant thought and diligence to navigate the ramifications of alternative asset management organizations' operations. To make wise judgments, investors should take into account a number of important tips. First off, considering the possible hazards connected with alternative assets, diversification and risk management are essential. To successfully distribute risk, investors should diversify their portfolios over a range of asset classes. It is crucial to conduct extensive due diligence on alternative asset management companies. Assessing their performance, investing methods, risk management procedures, and alignment with investors' values and goals are all necessary steps in this process.
Another crucial factor is to place a focus on investments that take Environmental, Social, and Governance (ESG) factors into account. ESG-aligned initiatives have the ability to improve society and the environment in addition to generating financial gains. It is crucial to ask these companies for transparency regarding their risk exposures, portfolio composition, and investment decisions because thorough and timely reporting is helpful in assessing investment performance and risks. Last but not least, before purchasing alternative assets, investors should evaluate their personal risk appetite. This is because some investments may have lengthier lock-up periods or more volatility, which may not be suitable for all investors' risk profiles.
Regarding recommendations for regulators, the upkeep of market integrity, investor protection, and financial stability are of utmost importance. Several initiatives are suggested in order to improve oversight and regulatory frameworks pertaining to alternative asset management organizations. Regulators would have access to more information about these companies' investing operations, risk management procedures, and ESG considerations if additional reporting requirements were implemented. Regulators would be able to more effectively oversee their operations thanks to the enhanced transparency.
It is crucial to regularly evaluate the systemic risks that are presented by the concentration of assets under these firms' management. Evaluation of possible hazards to the financial system can be aided by stress testing and scenario analysis. Creating norms or guidelines for the incorporation of ESG factors into investment strategies can promote ethical investing, have a positive impact on company conduct, and promote sustainable development. It's also critical to concentrate on investor protection and education. Investors should be informed about the potential risks and rewards of investing in alternative assets, according to regulators, who should make sure of this. Giving investors precise information on the features and complexity of these assets might help them make wise judgments.
5.2. Limitations of the Study
The study recognizes a number of constraints that might have affected the conclusions. Due to the size and diversity of the sector, one weakness of the research is that it may not cover the complete landscape of alternative asset management companies. Additionally, conclusions from qualitative research may be prone to intrinsic subjectivity and may be affected by participant opinions. The level of investigation may have also been limited by time constraints and lack of access to particular data.
5.3. Future Research Directions
The long-term performance of the alternative assets managed by these companies could be investigated in future study in the field of alternative asset management by looking at the risk-adjusted returns and correlations with conventional asset classes. Comparative research across various companies and geographical regions may shed light on the regional variances in approaches and effects. Furthering our understanding of alternative asset management firms' impact on the economy would entail examining the consequences of their tactics during various economic cycles and assessing the effects of their investment choices on economic stability and growth. In addition, investigating how regulatory changes affect these companies' behavior and operations may offer policymakers significant insights.
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Appendix
Interview Questions for Thesis on Alternative Asset Management Firms:
Can you provide an overview of your firm's investment strategies and the types of alternative assets you manage?
How does your firm approach shareholder activism and engagement in corporate governance decisions? Can you share any specific instances of such engagements and their outcomes?
What are the primary factors driving your firm's investment decisions in major corporations and financial markets?
How does your firm incorporate environmental, social, and governance (ESG) considerations into your investment strategies?
In what ways do you measure the impact of your firm's investments on the corporations you invest in and the broader financial markets?
How do you manage potential conflicts of interest between your firm's interests and those of your clients or investors?
How do you ensure transparency and reporting in your firm's operations and investment decisions?
What do you consider the main challenges and risks associated with alternative asset management, and how do you address them?
How do you view the regulatory landscape for alternative asset management firms, and do you believe there is a need for enhanced oversight?
How do you see the future of alternative asset management evolving, and what trends or developments do you anticipate in the industry?
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- License: CC BY
- Review type: Open Review
- Publication type: Article
- Submission date: 30 July 2023
Citation
Engelsberg, C. (2023). The Rise of Alternative Asset Management Firms: A Secret Force In Today's Society. Orvium Community.
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