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Peter Kraus’s Performance-Fee Experiment Is Working. Up Next: New Funds.

Aperture Investors has grown to $4 billion in five years — and now it’s launching an emerging market debt fund just as the rate-hike cycle could be nearing its end.

Peter Kraus, the former chief executive officer of AllianceBernstein, started Aperture Investors in 2018 with a different approach to asset management fees.

Unlike other active managers, Aperture would charge an “ETF-like” fee to invest in its funds if they underperform or meet their benchmark. But if managers beat their benchmarks, investors would be charged steeper-than-usual, performance-linked fees of 30 percent on returns above the benchmark, up to a cap.

The industry was due for that kind of innovation because, as Kraus argued at the time, investors would rather pay for investment performance than pay fees regardless of how well a fund did or didn’t perform. Big institutions had strong-armed hedge funds into paying 1-or-30, but few asset managers had made the fulcrum structure part of their DNA. (Since Aperture was founded, at least one long-only manager began to charge zero management fees.)

Five years later, Kraus says Aperture’s success proves he was right. Today, the firm manages $4 billion — the size it anticipated in its initial business plan — across a growing list of investment strategies that span asset classes and geographies. Much of that capital came from institutional investors before funds had three-year track records.

“There’s some validation in the structure and the fee model,” Kraus told Institutional Investor. “The more I see institutional clients, the more I hear that institutional clients want to pay on alpha and not just fixed fees. Not all institutional clients. But I think the probably more sophisticated ones. Certainly family offices, endowments, and foundations.”

There is evidence elsewhere in asset management that investors are still willing to pay higher fees for active management but that they would rather those fees be performance-based. Sixty-six percent of investors in hedge funds surveyed by BNP Paribas in December and January said that hurdle rates are their preferred fee structure, compared to only 15 percent a year earlier.

“Institutions appreciate the incentive structure,” Kraus said. “They appreciate the fact that the portfolio manager is incentivized to actually control the capacity [of a strategy], not take on assets just to take on assets. The institution is not looking to add to our asset growth. They’re looking to give us money that we perform with. That’s consistent with what any client should want.”

Aperture continues to expand its investment offering, and on Wednesday the firm launched its Emerging Debt Opportunity Fund.

The long-duration strategy will take advantage of opportunities stemming from the end of the rate-hike cycle and the normalization of the U.S. yield curve — which might happen sooner than predicted after the failure of Silicon Valley Bank and the related fallout. It will invest in corporate, sovereign, and quasi-sovereign debt securities in selected emerging markets, which Aperture believes have more attractive risk-adjusted returns than many developed market credits.

“An asset like this that’s paying you nearly 5 percent above Treasurys, that’s close to equity-like returns. And this is a double-B-plus [asset class]. So it’s not really like a low-grade, high-yield market. It’s actually very close to investment grade,” said Peter Marber, Aperture’s head of emerging markets and the portfolio manager of Aperture’s Emerging Debt Opportunity Fund and its New World Opportunities Fund.

“We’ve been swimming against the tide for a while here with this really strong dollar. But it could be an emerging market moment pretty soon, once the hiking ends and given what’s happened now with the Silicon Valley Bank and Signature [Bank],” Maber said. “It’s maybe accelerated the end of the cycle. A lot of people feel like the hikes that were expected now might be a little smaller. And maybe we might even see cuts coming later this year.”

Kraus said that Aperture and its partner, Italian insurance and asset management group Assicurazioni Generali, could launch another fund later this year, and he could see Aperture adding another three or four managers in the next five years. Liquid and less-liquid asset classes are under consideration, he said.

“Committing seed capital to a manager for a five-year time period is very attractive to a manager. They can’t get it [in] many places,” Kraus said.

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