Rithm Capital's Evolution Positions It to Capitalize on This $24.5 Trillion Market Opportunity

Rithm Capital (RITM 0.37%) started writing a new chapter last year. The real estate investment trust (REIT) acquired Sculptor Capital Management for around $720 million to launch the next stage of its evolution: It wants to become a leading alternative asset manager.

That positions it to capitalize on a massive and growing market opportunity. According to Preqin, the alternative asset management sector’s assets under management (AUM) will rise $8 trillion to a staggering $24.5 trillion by 2028. That’s a massive market opportunity for the company’s small and growing asset management business.

The evolution of Rithm Capital

Rithm Capital started charting a new course in mid-2022. The company, then New Residential Investment, rebranded as Rithm Capital to “highlight a new chapter in the Company’s evolution and reinforce its position as a leading diversified company in the financial services and real estate sectors.” It has gone from a mortgage REIT focused on acquiring mortgage servicing rights (MSR) to a more diversified financial services company.

The acquisition of Sculptor Capital Management in late 2023 was a “significant milestone for our team and an important next step in the growth and evolution of Rithm,” stated CEO Michael Nierenberg when it closed the transaction last year. Sculptor brought with it $33 billion of AUM. It also significantly expanded the company’s alternative asset management capabilities and scale.

The deal is already paying dividends. Rithm Capital recently agreed to a strategic transaction with fellow REIT Great Ajax. It will provide that company with a $70 million term loan to help it refinance some existing borrowings. Rithm Capital will become the REIT’s new external manager as part of the deal.

In commenting on the transaction, Nierenberg stated, “We are excited to grow our asset management platform through this strategic transaction with Great Ajax, which represents another step forward in our evolution as a global alternative asset manager.”

The evolution will continue

In acquiring Sculptor, Rithm Capital achieved its 2023 objective of pivoting its business to become more of an alternative asset manager. It aims to continue growing this business, which is crucial to create value for shareholders over the long term. Nierenberg commented on the company’s fourth-quarter call, “As we look forward, the growth of our asset management business will be critical to the revaluing of our equity in our company and just the overall valuation of what we do here at Rithm.”

The CEO noted on the call that its long-term aim is to evolve into a structure much more like the Blackstones and Ares of the world. Those leading alternative asset managers manage many different assets, including non-traded REITs. Because of that, the company will eventually need to simplify things a bit.

“To become, I think, a world-class asset manager, we need to continue to simplify our story,” stated Nierenberg on the call. Part of that simplification will likely mean simplifying its corporate structure by potentially converting from a REIT to a traditional corporation.

That would put the company in a better position to raise the funds it needs to capitalize on the growth ahead for alternative asset management. Growing its asset management business would enable the company to earn more fees. That could give it more money to return to shareholders over the long term. For example, leading alternative asset managers like Blackstone and Brookfield Asset Management typically return more than 90% of their earnings to investors via dividends and share repurchases.

Alternative asset managers also tend to have higher valuations because they produce steadily rising fee-based earnings. That drove Brookfield to spin off a portion of its asset management business to shareholders in 2022, Brookfield Asset Management, hoping the market would assign a higher valuation to that company based on its stable and growing fee-based earnings. Rithm Capital hopes to see a similar valuation uplift as it simplifies its story and structure while growing its asset management business.

Working to find its rhythm

Rithm Capital wants to become an asset manager because it’s such a massive market opportunity. It will give the company a very long runway to grow its fee-based cash flow. As those steady earnings expand and Rithm simplifies its story and structure, its valuation should improve because the market highly values asset managers. This transformation makes it an interesting stock for those seeking a unique way to cash in on the massive opportunity ahead for alternative asset management.

Matt DiLallo has positions in Blackstone, Brookfield Asset Management, and Brookfield Corporation. The Motley Fool has positions in and recommends Blackstone, Brookfield Asset Management, and Brookfield Corporation. The Motley Fool recommends Brookfield. The Motley Fool has a disclosure policy.

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