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Alternative asset giants on investment spree despite COVID-19 fallout

Alternative asset heavyweights have deployed capital throughout the coronavirus crisis and see further dealflow on the horizon, senior executives told attendees at Morgan Stanley's Virtual U.S. Financials Conference.

KKR & Co. Inc. has been bullish on M&A activity since the coronavirus outbreak. The firm has deployed $18 billion since Feb. 21, the date it considers the crisis to have started, its co-president, Joseph Bae, said. Of this, $7 billion has been invested from its global credit books and $11 billion from its equity business.

Its pace of investment has been "intentional" with the firm capitalizing on the "unprecedented volatility and dislocation in the markets to really buy high-quality businesses at attractive prices," Bae said. Investment activity has been driven by "a couple of mega themes" that the firm began tracking before the coronavirus outbreak, he added.

The themes include digital transformation and the use and consumption of data, and infrastructure investments, which the firm sees as "very stable, very cash generative, defensive, non-cyclical businesses," Bae said. "Nesting" opportunities is a third theme, and the firm has invested in an eBook distributor, a mobile gaming business and an online pizza delivery business under this strategy. Finally, it is seeking opportunistic investments in businesses that have "stretched balance sheets, maybe too much leverage, or a need for liquidity."

Asia, which was trading at a meaningful discount to the U.S. and Europe, was KKR's most-invested in region in 2019, Bae said. It remains attractive, opening up two to three months faster than the rest of the world. Its economic activity — and KKR's investment pipeline there — is accelerating.

Apollo Global Management Inc., which made gross purchases of $40 billion across the platform during the first quarter and about $10 billion more in April, views three stages of opportunity, the first being market dislocation, co-president James Zelter said. Markets have been "on the downside and then back on the rally because of all the Fed activity," he said.

A market reset has created a need for capital solutions, Zelter added. "There are opportunities [here] for our flexible capital in the platform, whether it's from our hybrid value vehicles or other longer-dated vehicles." As broader, gradual recovery starts, the market will see more of a distressed opportunity set.

In general, activity has been a "bit more muted" and that is likely to remain the case over the coming weeks, but there is significant opportunity for alternative asset managers, Zetler said. "It's one thing to turn the economy off on a dime with a light switch and another one to turn it on — and there will be some prolonged impacts to that, which we expect to be very, very active across the breadth of our platform."

Carlyle Group Inc. Co-CEO Glenn Youngkin said the firm has begun to shift its focus to investing, and its global credit business is its busiest group. "We're encouraged by not only the capabilities and the support from investors, but also the opportunities that they are seeing," he added. The firm has also identified opportunities in Asia, a number of its growth sectors and across its solutions business, particularly in secondaries.

Ares Management Corp. has been more active in the credit markets than the equity markets, CEO Michael Arougheti said, adding "[it's] harder to price equity risk than credit risk today, and it is harder to price risk in the most impacted sectors." The bulk of the firm's activity has been rescue lending through its alternative credit and direct lending strategies, which it thinks is going to be "the investment opportunity here for the next little while."

New buyout activity is "quite slow" but there are some "green shoots" as people begin to think about what a recovery might look like, Arougheti said. The firm has done a couple of deals in "very clearly non-COVID-related industries" like life sciences, software and technology.