Uncorrelated by Design: Partners Group's Cross-Sector Approach to Private Markets Royalties

In this episode of the Dakota Insights Manager Interview Series, hosts Chris LeRoy and Alex DeMarco sit down with Stephen Otter, Managing Director and Global Head of Private Markets Royalties at Partners Group. Otter traces his career from energy M&A in London to energy royalties in Switzerland, before joining the Partners Group founders' family office in 2021 to build a cross-sector royalties strategy from scratch. In early 2024, that strategy was formally adopted as Partners Group's fifth asset class — the first new asset class the firm has launched in nearly 20 years — and has since grown to $2 billion AUM.Otter opens with a foundational explanation of what a royalty actually is: a contractual percentage of revenue generated from day-to-day consumption of assets the investor owns but does not operate. Rather than funding costs or managing operations, royalty investors hold the underlying IP — copyrights, patents, license agreements, land title, or subsurface rights — and receive revenue participation from a third-party operator. Because they bear no cost exposure, royalty investors are insulated from cost inflation and benefit directly when pricing increases.What distinguishes Partners Group's approach is its cross-sector construction. Every prior royalty strategy focused on a single sector — music, healthcare, or energy. Partners Group is the only private markets manager to treat royalties as a standalone asset class spanning three core sectors: healthcare and life sciences (post-FDA approved products only), entertainment (music, film and TV, video gaming, books, YouTube, brands, and sports), and energy transition (US natural gas, green metals, carbon, and water). Because there is no meaningful correlation between a music royalty, a pharmaceutical royalty, and a gas royalty, the blended portfolio carries very low correlation to equities, credit, or infrastructure.The strategy deploys capital through three transaction types: buying existing royalty streams, lending against royalties secured by the revenue stream, and creating new royalties by providing upfront capital in exchange for a negotiated revenue share. On a trailing twelve-month basis, the split has been approximately 40–45% buying, 30–35% lending, and 10–15% creation. Each transaction type carries a different risk-return profile, and the combination helps further stabilize portfolio-level outcomes.Return targets are built on a conservative underwriting discipline: every investment must generate low-to-mid-teen returns on a buy-and-hold basis, with exits priced as upside only. The strategy targets net returns of 8–10% with a 4–6% annual yield distribution. In seven years of operation, the portfolio has recorded only two negative quarters. Three recent exits have come in at IRRs ranging from approximately 25% to over 40%.Otter closes by making the case for the evergreen structure as the natural home for royalties. Closed-ended funds force premature sales; listed structures reintroduce public equity correlation. An evergreen vehicle matches the long-dated duration of royalty assets, supports the diversification required across 20–30 investments per year, and allows consistent yield distribution without dependence on exit timing — precisely the characteristics that make royalties a compelling portfolio stabilizer.