HOUSE_OVERSIGHT_025563.jpg

Morgan Stanley | RESEARCH
NORTH AMERICA INSIGHT

tives 6.8 years. Said differently, the alternatives have nearly 55% longer duration of the asset base.

Exhibit 16:
Redemption Rates by Company for 2016: Alts see less redemption money as a % of AuM relative to traditionals and duration of assets ~55% longer and C-corp alts with the longest duration.
Annual Redemption Rates by Company: 2016

[Chart: Annual Redemption Rates by Company: 2016]
[Y-axis: 0% to 35%]
[X-axis/Bars: VRTS, WDR, JHG, BEN, APAM, IVZ, AMG, KKR, CG, BX, OAK, OMAM, ARES, HLNE, APO, PGHN, Trads Avg, Alts Avg, C-Corp Alts Avg]
[Annotation: Alts have ~55% longer duration of AUM compared to traditionals. Based on 2016 redemptions and outflows we see alts avg. duration of 6.8 years vs. trads at 4.3. C-Corp alts have the longest implied duration of assets at 11.8 years]

Source: We use Fee Paying AUM for the Alts; Soure: Company Data, Morgan Stanley Research
Note: HLNE outflows are for an average of FY 2016 and FY2017

C) Management fees that are paid on committed money rather than net asset value. This provides much more stability and down-side protection, but limits upside to management fees as investments appreciate in value do not automatically translate into higher mgmt fees. The Alts then participate in investment performance through performance fees or carried interest, whereas the traditionals participate in performance via greater management fees on a higher value of invested assets.

D) Relatively more insulation from fee pressure in private markets given limited low cost competitors (indexed funds and ETFs for traditionals) and higher demand for products driven by the search for higher return and diversification from investors. In fact, recent demand for some PE funds has actually led to supply constraints and allowed Alts to give less fee concessions. Apollo, for example, closed fundraising for their flagship Fund IX last year at $24b, but the demand was 25% higher at $30b. As a result, the company said "economics to Apollo for Fund IX are considerably better since we did not need to provide as many management fee discounts." This supports the forward look on growth in management fee revenues; however, we could see some mix shift into lower return profile (and lower fee) products that could begin to pressure fee rates over time.

2) Publicly Traded Alts Comps

We see Hamilton Lane (HLNE, Equal-weight) and Partners Group (PGHN, Equal-weight, covered by Anil Sharma) as offering an upside scenario for Alts© fee-related earnings multiples. Hamilton Lane is ~90% fee earnings and currently trades at 23.4x multiple on our CY2018e EPS. Similar to alternative asset manager peers, the company gets paid management fees on drawdown funds and customized separately managed accounts with stable fees paid on committed capital. PGHN is a publicly traded alternative asset manager in Switzerland, and as a C-corporation it is the closest true comp for HLNE.

While we see the publicly traded C-corps as good comps, there are several factors that could be elevating the multiples. HLNE is a small cap stock with $2b market cap and may not be the best comp for the large cap PE firms. The company has limited float (currently at ~25%) and scarcity value as the only US based publicly traded alt in a C-corp structure. PGHN is a trades in Europe and may not be a great comp because of that. Lastly, while not drastically different, HLNE and PGHN have had higher organic growth historically and looking out over the next 2 years we expect their growth to outpace most of the alts. As a result of the high multiples at the public C-corp alts, we have heard partnership alts increasingly use HLNE as a peer comp.

Exhibit 17:
We expect Alts to deliver similar organic growth profile over the next few years as C-Corp Alts Hamilton Lane and Partners Group
Organic Asset Growth: C-Corp Alts vs. Partnership Alts

[Chart: Organic Asset Growth]
[Legend: Blue Bar = Avg. 2014 - 2017E Growth Rate; Tan Bar = Avg. 2018 - 2019 Growth Rate]
[X-axis Categories: APO, CG, KKR, BX, ARES, OAK, HLNE, PGHN, Alts Average]

Source: Company Data, Morgan Stanley Research
Note: HLNE average organic growth includes years 2015 - 2017e where we have data; The alts average uses 2014 - 2017e for consistency with the traditionals organic growth chart above

MORGAN STANLEY RESEARCH 13
HOUSE_OVERSIGHT_025563