Highland Capital Management is staking its claim as an early mover among the growing ranks of private fund managers building up non-traded registered alts product lineups for the wirehouse and independent advisor markets.
Under its NexPoint Capital brand, the $14.8 billion Highland – known mostly for its credit hedge fund business – now offers a non-traded business development company (BDC), a non-traded real estate investment trust (REIT), and a non-listed interval fund focused on real estate, with plans to add a credit interval fund in the works. With all of them run in-house and marketed with its own sales force, alongside a publicly traded REIT and alts mutual funds, Highland has charted a course different than private fund peers that are partnering on product and distribution efforts with existing non-traded fund players.
“We think owning the distribution longer term is going to be an important thing,” says Brian Mitts, COO of the Highland unit that manages the advisor-focused product suite. “We’re on the leading edge bringing a different type of firm into this world as a pure-play manager.”
The list of private fund managers that have jumped into the market with partners includes Blackstone Group, Apollo Global Management, and Carlyle Group, along with more recent entrants such as Bain Capital and Ares Management. Both Blackstone with a REIT and Apollo with a planned credit closed-end fund have begun to develop individual products in house, and both firms have been trying to build out their own sales forces for the advisor market.
Blackstone is likely to be a prime rival that uses its own resources, with the REIT it launched last summer already logging $477 million in sales, after cracking into the wirehouses with a product once reserved for independent brokerages, says Kevin Gannon, managing director at Robert A. Stanger & Co., which tracks the market.
“With Blackstone making such a splash, other [private fund managers] will probably say that’s a good place to look,” he says.
Alts managers may also see traditional shops rolling in, with PIMCO in December launching its first non-listed interval fund, a multi-sector credit strategy.
The flurry of recent product development has come at a time of turmoil for the non-listed funds market, which saw REIT sales slump to around $4.5 billion last year from nearly $20 billion four years ago, and with BDCs also facing sales challenges, Gannon says. Both markets face large-scale pressures from a new Financial Industry Regulatory Authority reporting rule that took effect last year and the uncertainty caused by the Department of Labor’s fiduciary rule, which was supposed to go live next month but is now in a holding pattern.
Sales should rebound once the industry sees regulatory questions settled and managers convert their products to optimal formats, Gannon says.
Highland’s efforts are certainly geared toward growing its non-traded funds business at a time when the firm has seen asset losses, shedding more than $4 billion from the $19 billion it reported having last summer.
It had begun building out the non-listed fund business several years ago with new products and the hiring of an independent brokerage sales team, intending to not rely solely on the wirehouses for its retail exposure, Mitts says. “It’s a different channel, different sales cycle, different product, and because of that you want sales people with specific focus,” he says.
The firm’s product menu in the non-traded market overlaps with its core alts credit business but also taps its real estate and healthcare investing experience, Mitts says. Its real estate interval fund launched last year, and the healthcare-focused BDC has been around since 2014, while a new credit interval fund may grow out of converting an existing mutual fund, he says.
The BDC’s target is $1.5 billion and the REIT is programmed for $1.1 billion. Future product development will track what the market wants, Mitts says.
“People have done a lot of work to get ready to implement the DOL rule, creating share classes and [advisor] comp structures that are more [investor-]friendly, lower on the front end and more consistent across products,” he says. “It’s all about removing conflicts of interest… and ultimately what the clients and the regulators are going to be happy with.”
Private fund managers aiming for the non-listed market will probably concentrate on developing products, rather than hiring their own sales teams, in part because that offers a faster path to market, Gannon says. An even quicker route is managers acting as subadvisors to existing players, such as Bain’s partnership with Griffin Capital.
And while few of Highland’s private fund manager peers have matched it by planting flags in all of the non-listed fund segments, it should expect that sort of company soon enough, Gannon adds.
Highland has a new competitor on another front, as Flat Rock Global recently launched its first private market BDC, with a $1.5 billion target and its sights on another channel –independent registered investment advisors (RIAs). Its new strategy will not only buck the typical BDC by only investing in senior secured loans, mostly self-originated, but will also do away with the traditional model that pays advisors hefty sales loads, says Robert Grunewald, the firm’s CEO.
“There will be no load, no other back end fees,” he says. “All of the distribution costs will be absorbed by the manager. It’s extremely unusual to unprecedented in this market.”
Flat Rock has identified about 3,000 RIAs that would be good candidates for a non-traded BDC, and has contacted more than 100 of them already, says Grunewald, who formerly was president and CIO of Business Development Corp. of America. He expects to double Flat Rock’s staff to 12 employees later this spring to help with the huge chore of selling into such a diffuse market.
“The RIA community is going to continue to grow,” he says. “We have the wind at our backs.”
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