Assets Under Management (AUM): Definition, Nuances, and Real-Life Usage

Assets Under Management (AUM) Definition: AUM represents the total market value of the capital managed by an investment fund on behalf of its clients; it’s a prevalent performance metric across many fund types, such as private equity firms, hedge funds, and venture capital (VC) firms.

Two primary factors influence the assets under management (AUM) for firms such as hedge funds that invest in liquid assets:

1. The market performance of the fund.
2. The inflows and outflows of capital into the fund.

Positive returns on investments increase the AUM, while withdrawals by investors decrease it.

For entities like private equity and VC firms, which hold illiquid assets (e.g., investments in startups and other private companies), AUM reflects the amount of capital they’ve successfully raised from their Limited Partners, such as pension funds, endowments, and funds of funds.

Since these firms restrict the inflows and outflows after the capital is raised, the true market value of their investments isn’t known until they sell them, which may take many years.

This explains why “market performance” does not factor into AUM for these firms in the same way.

Why Assets Under Management is Deceptive for Some Firms

The stated AUM can sometimes be misleading for investment funds such as venture capital, growth equity, and private equity firms because these firms operate based on “commitments” from their Limited Partners (LPs).

Essentially, LPs pledge a certain amount of capital to the firm, which can be drawn upon when needed for investments – but the LPs do not contribute this promised capital upfront.

This system means that a firm’s declared AUM does not represent its “cash on hand.”

For example, a firm with an AUM of “$1 billion” doesn’t have $1 billion sitting in a bank account ready to invest. Instead, that $1 billion number simply means that they’ve won commitments from their investors to contribute a total of $1 billion in capital over the life of the fund.

As this firm invests in companies, it will issue “capital calls” to its Limited Partners.

As a simple example, let’s say that a Limited Partner such as a pension fund has agreed to invest $50 million in a private equity firm’s latest fund.

This pension won’t contribute the $50 million upfront – instead, it might contribute $10 million in Year 1, $5 million in Year 2, $20 million in Year 3, $5 million in Year 4, and $10 million in Year 5.

It contributes these amounts as the PE firm reviews deals and invests in companies over the years.

Even though the private equity firm still counts this $50 million toward its assets under management, it only gets the funds in smaller portions each year as it invests.

Assets Under Management (AUM) vs. Net Asset Value (NAV)

Net Asset Value (NAV) represents the total value of a fund’s assets minus its liabilities, and it’s another important metric for investment funds.

For mutual funds and exchange-traded funds (ETFs), NAV is often listed on a per-share basis, offering investors a clear picture of the value represented by each share they own and how it compares to the current share price.

For example, if the NAV per share is $5.00, but the current share price is $4.50, this could be a sign that the ETF is currently undervalued since you can buy the shares for less than their intrinsic value.

While AUM indicates the total market value of assets managed by a fund, NAV also accounts for the fund’s liabilities to provide a more comprehensive view of its net worth.

The Net Asset Value represents capital actively “in play”: Funds held by the investment entity or already deployed in the market.

On the other hand, AUM, especially for firms like private equity or venture capital, might include capital commitments not yet drawn from the Limited Partners, as noted above.

Therefore, while AUM is more about “potential” capital, NAV is closer to the firm’s “actual” value after repayment of its obligations.

How to Use Assets Under Management (AUM) in Real Life

AUM is mostly used for benchmarking different funds, which explains why many private equity firms and alternative investment funds track AUM and AUM growth as key metrics.

Here’s an example taken from this investor presentation for Apollo’s acquisition of Athene:

Beyond just the growth rates, the sources of AUM growth are very important.

Organic growth in AUM, resulting from superior investment returns, demonstrates good management and investment choices.

On the other hand, growth primarily from capital inflows might indicate effective marketing but doesn’t necessarily mean the managers are skilled at generating returns.

One application of AUM in valuation is the Enterprise Value to AUM multiple (TEV / AUM).

This ratio assigns a value to each $1.00 of assets managed by the fund; it’s similar to valuing a house on a $ per square foot basis.

Essentially, it tells us how much investors are willing to pay for the fund’s management of its assets.

Higher-performing funds tend to have higher TEV / AUM multiples, while lower-performing funds tend to have lower TEV / AUM multiples.

(Note that since Enterprise Value is always much lower than AUM, this TEV / AUM multiple is normally expressed as a percentage, as in the example below.)

You can see an example in this Fairness Opinion from Sandler O’Neill for Brookfield’s acquisition of Oaktree Capital, which uses TEV / AUM in the precedent transactions: