Has Blackstone Group become the most profitable PE again?

With $1 trillion in assets and unparalleled returns, the private equity giant conquered Wall Street after its 76-year-old founder Steve Schwarzman (Steve Schwarzman) has not stopped, he also wants to occupy overseas markets. And the company’s heir, Jonathan Gray, has also prepared weapons to target global wealth.

In September 2023, Steve Schwarzman, the billionaire founder and CEO of Blackstone Group, attended a party in Paris. celebrated the opening of a new 26,000 square foot office with its employees in Europe. In the elegant courtyard built in the 18th century, beside him was Gérard Errera, the president of French Blackstone and the former French ambassador to Britain. That morning, at the International Private Equity Market Annual Conference, Schwarzman delivered a keynote speech in front of more than 2,000 representatives of Europe's largest investors and family offices. For Schwarzman, this trip to Europe was short and compact. Just the day before, the 76-year-old billionaire was in Frankfurt, Germany, announcing the establishment of a 14,000-square-foot Blackstone office on the top floor of a glass and steel skyscraper in the financial district.

Schwarzman said at his Park Avenue headquarters in New York, "I have been involved in countless office dedications in my life, but this is more important than ever. To be exciting,“The farther you are from headquarters, the more effort you have to put in to ensure a unified corporate culture and avoid risks in transactions.”

As Blackstone expands globally, the company now has 17 offices around the world and has doubled the number of overseas employees in just five years.

Blackstone President and Chief Operating Officer Jonathan Gray is always on the road, only arriving in New York every Monday for executive meetings. While Schwarzman is in Paris, Gray is 3,500 miles away On the way to Toronto. Blackstone will establish its first Canadian office here. Previously, he also went to the Blackstone Group in Singapore, and the Blackstone office in Singapore is also preparing to double the number of employees to 200 within two years. Even after leaving In New York, Gray is still on a "business trip". On the way to the headquarters at dawn, he usually communicates with his subordinates in Mumbai.

Malls may be moribund in the United States, but they are booming in India. Nexus Spreading over one million square feet in Mumbai, Seawoods is the most luxurious of Blackstone's 17 malls in India. Image source: BLCKSTONE

India Matters Blackstone, which owns 40 companies in India, is the country's largest commercial real estate player. India has been the private equity firm's top-performing market. Last May, it completed a $1.9 billion real estate investment trust (REIT) deal. , Blackstone took India's largest shopping mall operator Nexus public.

Blackstone's blitz expansion internationally is because the international market offers more funds. U.S. institutional investors have allocated 25% or more of their funds to private equity funds, and they do not intend to invest more funds in this field. But looking around the world, private equity investment is still in its early stages, and there are hidden risks Huge opportunity. Private companies with more than $250 million in revenue account for 86% of investable businesses, according to Capital IQ. And Blackstone estimates there are $80 trillion in individual investor assets worldwide, with a large portion in European enclaves, Such as Zurich and Paris, and some in Asia, such as Tokyo, Seoul and Mumbai.

Schwarzman's current net worth is approximately $38 billion, and if you talk to him about the business he founded in 1985, you'll quickly realize , the traditional leveraged buyout method he once created is undergoing changes. In the United States, the traditional private equity model, which is to raise funds from large institutions, acquire traditional companies, take on large amounts of debt, and then quickly make profits by cutting costs and re-adjusting the capital structure, is declining, or has become a Slower-growing industries. There are more than 2,000 private equity firms today, an increase of less than 500 from a decade ago.

The new investment trend is different from this, focusing entirely on development and growth. Companies are acquiring companies in logistics, infrastructure, life sciences and e-commerce and pushing these companies to grow rather than shrink for profit. This is different from traditional acquisition methods. Traditional private equity funds have a limited life span, only 10 to 12 years, and serve entirely this cost-cutting and profit-making model. Today's popular investment methods are more sustainable, and acquisition funds are beneficial to individuals. Open to investors and no deadline. Like Warren Buffett's Berkshire Hathaway, Blackstone's new approach is to buy and hold, and new money does this by limiting redemptions. From nothing ten years ago to today, this new type of perpetual fund accounts for 38% of Blackstone's $1 trillion in assets under management and also contributes more fee income.

Gray invented the Perpetual Fund (Perpetuals) at Blackstone Group. The 54-year-old entrepreneur is driving Blackstone's reinvention into the world's largest full-service capital provider, directly challenging established large capital centers such as J.P. Morgan & Co., BNP Paribas and Hong Kong's HSBC. On the lending side, Blackstone's credit and insurance businesses already have $319 billion in assets and are attracting money from insurance clients who want to earn more than 150 basis points for the cost of investing in the public bond market.

Gray, who now has a net worth of $7 billion, said, "It's not the same as private equity in your parents' days. Changes have happened. Who can To think that a private equity company can have the lowest cost capital? I'm already lending A-rated credit and AA-rated credit."

Blackstone became the The first alternative asset management company to be included in the S&P 500 Index. Blackstone has acquired about 230 different companies around the world and employs more than 650,000 people, far more than rivals Apollo and KKR Group. Blackstone's unrivaled $337 billion commercial real estate portfolio includes 12,000 properties representing 1.1 billion square feet worldwide.

Oppenheimer analyst Chris Kotowski said, "It seems too early to say that there has been an industry boom, regardless of Whether it's raising capital or operating capital, everyone knows this is going to be a global competition."

Gray is particularly optimistic, talking about the past "Alternative asset management is maturing as investors realize that giving up liquidity in exchange for higher returns doesn't just apply to high-risk areas, which means our market has grown a lot," said the company at the time of the funding acquisition. ."

Among the emerging tycoons on Wall Street, few are as humble and low-key as Jonathan Gray. He joined Blackstone in 1992 just after graduating from the University of Pennsylvania with a major in English and finance. He can be said to be the perfect entrepreneur.

He grew up in a middle-class family in the suburbs of Chicago. His parents divorced when he was 6 years old. "My parents' divorce taught me that even things that are stable don't last long, and can fall apart in a matter of seconds," Gray said during a commencement speech at her daughter's prep school last summer.

He attended high school in Highland Park, Illinois, where he had acne, never had a girlfriend, and was terrified of public speaking. “I wasn’t a popular kid, I wasn’t a star athlete, and I wasn’t president of Model United Nations,” he says. Almost everyone at Blackstone knows the story of his time as a walk-on player on the high school team: once in a certain quarter. Neither played, and the team won just one game in 24 games.

In 1992, Gray entered Blackstone. During his first year, he was an analyst in New York, mainly analyzing numbers and preparing pitches for senior employees. book. He quickly developed a reputation for his ability to capture details. He worked next door to John Schreiber, then head of Blackstone Real Estate's Chicago division.

Schreiber, now 77, recalled, "He liked to poke his head over the next door and ask me a lot of questions." By 2005, Gray was 34. At that time, Schwarzman appointed him head of the company's growing real estate division. According to Schwarzman, it was Gray's strategic vision that led to Blackstone's two most profitable deals. He embraced CMBS, or commercial mortgage-backed securities, at a very early stage, allowing Blackstone to complete larger transactions at a lower cost. Gray also recognized that Blackstone could buy publicly traded real estate companies, many of whose owners had acquired large properties over the years but could trade them for less than the sum of their individual holdings.

The two groundbreaking transactions mentioned above both occurred in 2007, when the real estate market was at its peak. The first was the $39 billion acquisition of Sam Zell's large office assets. Citing concerns about the market, Schwarzman directed Gray and his team to immediately sell nearly $30 billion in assets to mitigate the risks of the deal. That all but removed most of the risk from the deal, but Blackstone retained prime properties in New York, Boston and California. Blackstone's partners ended up tripling the value of their investment.

Another big deal is Blackstone's $26 billion acquisition of the Hilton Group, including the Waldorf Astoria Hotel in New York and the Hilton Waikiki Beach Resort in Hawaii. The deal was completed in October 2007, just as the global financial system was on the verge of collapse. The deal took six years to complete, but it taught Gray that even if you overpay for quality assets with a strong brand, with the right management and financial support, you can still reap huge returns. At the nadir of the recession, Blackstone wrote down 71% of its investment in Hilton, but Gray soldiered on, buying back its debt at a deep discount and injecting another $800 million into the company. After taking Hilton back public in 2013, Blackstone achieved its largest profit ever, about $14 billion.

In 2018, Gray was appointed president and chief operating officer by Schwarzman after the real estate business brought $115 billion in profits to the group. Succeeding another Blackstone billionaire, former president Tony James.

Blackstone's traditional institutional buyout fund business is worth $641 billion and remains very strong. But two other businesses are the main sources of new growth.

A sharp rise in interest rates over the past two years, coupled with a decline in bank lending, has allowed so-called private credit, or direct lending by non-banks, to boom. Against this backdrop, Blackstone merged its credit and insurance businesses last September and is aggressively courting insurance clients accustomed to investing in publicly traded bonds. Currently, the assets of this business unit have reached US$319 billion.

Regarding public market bonds that include underwriting and ratings agency fees, Gray asked, “Think about a life insurance company that has thirty years of debt. Why? Why are they just holding the bond until maturity and paying that much for liquid assets?”

Big Trend That is, credit will be transferred from purely liquid assets to large amounts of minority-held private equity.

Blackstone now offers investment-grade debt to insurance companies with yields 150 basis points higher than comparable bonds. "One of the big trends is that credit will migrate from being a purely liquid asset class to one that has a significant share of the private sector," Gray said. According to the National Association of Insurance Commissioners, U.S. insurance companies alone held more than $5 trillion in bonds as of the end of 2022.

What is "a considerable minority"? Gray thinks it's 20%. "This is going to be a global phenomenon," he said. "It's going to happen here and it's going to happen everywhere."

Another growth driver Blackstone will rely on will come from wealthy investor clients of global wealth managers. Currently, the company has $240 billion (nearly a quarter) of its assets coming from retail investors, growing at a compound annual growth rate of more than 30%.

This is where another of Gray's innovations, so-called sustainable investing, will play a key role. Around 2015, Gray took an in-depth look at the investment options available to individuals who wanted to invest in construction and other institutional-grade commercial real estate. In addition to riskier one-time property investments, they can invest in volatile publicly traded real estate investment trusts (REITs) or non-traded private placements that are relatively illiquid, lack transparency and have upfront fees of up to 12%. Real Estate Investment Trust.

"Our insight is that if we bring Blackstone's best-in-class real estate skills here and our fees are basically the same as those of institutional investors, What will happen?" Gray said. In 2017, he launched the Blackstone Real Estate Income Trust, a mutual fund-like product for brokers with a minimum investment of $2,500, a 1.25% advisory fee, a 12.5% Performance fee and 5% guaranteed profit. Unlike traditional private equity funds, there are no withdrawals or maturity dates and investors' funds are put to use immediately. Another investor-friendly feature: When it comes time to file taxes, these funds issue 1099 forms rather than K-1 forms to limited partners, which they consider a nuisance. However, the redemption amount shall not exceed 2% of net assets per month and 5% of net assets per quarter.

Gray's invention is on the shelves of brokers such as Merrill Lynch, Morgan Stanley and UBS skyrocketing, and these brokers often tack on their own sales fees. By 2021, BREIT assets, which own student housing, data centers and warehouses, climbed to $70 billion. Subsequently, as the market fell in 2022, nervous investors filed redemption requests, forcing Blackstone to limit withdrawals and assets fell to $61 billion. Gray maintains that BREIT has performed as expected, noting that including monthly dividends, it has returned about 11% annually.

BREIT's success spawned the Blackstone Private Credit Fund (BCRED), which launched in 2021 and currently has $29 billion in assets. Blackstone's rivals, including Apollo and KKR, have also joined the game. It is estimated that more than $1.2 trillion has poured into perpetual products.

Joan Solotar, global head of private wealth at Blackstone Group, said: "We went from issuing scaled-down funds to now having a full suite of open-end funds . Allows you to participate in the market every day, rather than only once every few years."

Blackstone's perpetual funds are not just for wealthy individuals , also favored by institutions. Blackstone Infrastructure Partners (BIP) has $32 billion in assets and Blackstone Property Partners (BPP) has $66 billion.

Don’t think that these novel funds are just old wine in new bottles. Perpetual funds are changing Blackstone’s operating model itself.

The company recently launched the Blackstone Private Equity Strategy Fund (BXPE), which essentially combines its original acquisition business Packaged into a fund that is friendly to individual investors. As of early January, BXPE had raised $1.3 billion.

"We will continue to introduce a series of new products," Schwarzman said. "Distributors currently hold about 2% of their assets in alternative investments, and they We hope to expand our customer base to 10% to 15%. So this is another area with explosive growth potential, and we are positioned to be number one in the world."

Of Blackstone’s $1 trillion in assets, approximately 70% is invested in North America, 20% in Europe, and 10% in Asia. The company also has a sizeable footprint outside the U.S., with 1,250 employees in overseas offices, but it will continue to grow.

In a conference room on the 10th floor of the Marunouchi Building in Tokyo's financial district, Daisuke Kitta, head of the Japanese real estate department of Blackstone Group, and a private equity investment trader were sitting Atsuhiko Sakamoto and Ryusuke Shigetomi, the company's chairman of 75 employees. Shigetomi joined Blackstone in 2021, having previously served as vice chairman of global investment banking at Morgan Stanley and at Mitsubishi UFJ Financial. Like former French ambassador to Britain Gérard Herrera, the 40-year finance veteran is tasked with opening doors in a heavily regulated market dominated by big banks.

Blackstone has invested in Japanese real estate Nearly $7 billion. In 2020, when Blackstone was in talks to acquire Alinamin Pharmaceuticals from Takeda Pharmaceuticals, the pandemic hit, but Blackstone's local team was still able to conduct on-site visits and work during a time when international travel was restricted. The $2.3 billion deal remains the largest in Japan’s healthcare sector.

According to data research firm Altrata , Japan ranks fourth in the world in terms of the number of high-net-worth individuals, behind the United States, China and Germany. According to Japanese government estimates, Japanese citizens hold approximately US$13 trillion in personal financial assets. About 50% of them are cash and low-yield Bank deposits. The good news for Blackstone is that government reforms have finally opened up the country's $5 trillion asset management business." Japanese Prime Minister Fumio Kishida recently said: "We will strongly encourage advanced assets management, and attract new players.

Blackstone has partnered with Tokyo-based Nomura Securities and Daiwa Securities to raise funds for BREIT Funds, whose clients have been injecting yen into BCRED's floating-rate debt. "We maintain fairly close dialogue with financial institutions. "Shigetomi said.

Although London remains Blackstone's largest overseas branch by far, with 600 employees and a new building in Mayfair An office tower, but the continent has become fertile ground for new business.

James Seppala, head of European real estate at Blackstone Group, said: "Real estate It’s a relationship business, so you have to be part of the local market. Last year was a big one: about 50% of Blackstone's real estate business came from Europe, where the theme was "logistics, logistics, logistics." The company is Europe's largest landlord, with more than $100 billion in assets across the continent, half of which are warehouses, distribution facilities and fulfillment centers.

In France, Blackstone has invested $25 billion and hired managing director of credit Florent Trichet in 2022 . "Distributors across the country, like private banks, want you to be able to converse in French, and they want you to provide material in French, so it makes sense to have someone on the ground who can explain the product to investors," he said. "You You don’t want conference attendees to be anxious about catching a Eurostar or a flight.”

As with private credit and real estate, the perpetual fund will be available at Blackstone Play an important role in the quest for world domination. These novel funds are definitely not old wine in new bottles, but they are clever ways to absorb the cash of wealthy investors. Perpetual funds are changing Blackstone's operating model itself, moving from transactional to long-term buy-and-build. They're also helping companies win deals.

"We worked with the family that owns Carrix, the largest port operator in the United States and Mexico, and with the Benetton family on the private ownership of Mundys (formerly Atlantia) ation. Mundys is one of the world's largest transport infrastructure companies, owning roads in Spain and France and airports in Rome and Nice," Gray said of the deal for Blackstone's $40 billion infrastructure group. "These families like the idea of ​​sustainability. If we told them we were going to buy it and sell it in three years, they would say, 'I don't want that.'"

In 2022, Seppala’s team did not sell Mileway, a large warehousing business company established in London and spread across 10 countries that Blackstone Group and management took six years to build. Instead, they invested in a US$23 billion It was recapitalized in the transaction. Ownership now belongs to the company's perpetual fund.

Blackstone's investment in Paris-based Lazeo last year was another growth-oriented deal. The family-owned company operates 160 beauty centers, offering services such as "laser hair removal, injectables, body sculpting and medical-grade facials." Lazeo is growing rapidly with its recent acquisition of Munich-based Cleanskin.

Company founder Dr. Bernard Sillam  hopes to transfer control to his co-founder, his son  Dmitri, who needed financing. Blackstone has positioned itself as a long-term development partner, providing a structure that maintains family control. “With just one phone call, we knew right away they were the right partner,” Dmitri said.

Despite the profound changes taking place in the private equity world, changes, but don't expect Schwarzman or Gray to say a disparaging word about Blackstone's traditional leveraged buyout work.

"The original business is still great," Gray insisted, noting that Blackstone has raised $120 billion in traditional structured funds over the past two years. . "I think it's like ice cream: Is vanilla better than chocolate? Everyone has different goals. Some endowments, for example, that have long-term goals like these drawdown funds."

Blackstone recently announced its 2023 results. So-called distributable profits were $5.1 billion, and assets under management climbed to $1.04 trillion, despite the impact of lower expenses due to lower asset sales last year. Private credit has been a star business, with the biggest gains in the company's strategy, thanks to rising interest rates. On the distribution side, perpetual funds continued to shine, growing to nearly $400 billion. As for fund reserves, Blackstone has an impressive $200 billion, and Gray told analysts he's looking for deals.

Schwarzman said on the earnings call: "One of the key advantages of our leading scale is to have more, better, and more Rich private data that informs our investments. We use real-time data on these holdings to develop macro insights, which are then shared across all our businesses, allowing the company to quickly adapt to changing conditions."

More people overseas will translate into more data, more transactions and more money in the pockets of Blackstone shareholders and its 250 partners. Blackstone shares are up 83% in 2023, compared with 81% for KKR, 49% for Apollo, and 24% for the S&P 500. Last year, dividends from Schwarzman's stock holdings alone totaled $770 million. Gray's figure was $139 million.

Schwarzman, who may never retire, insists his global ambitions have nothing to do with money. Of his life's work, he said: "I look at everything and say, 'How far can we take this?' If I see some amazing opportunity, I get really excited. Why can't we Own it? Take action."

Translated from

https://www. forbes.com/sites/sergeiklebnikov/2024/02/05/blackstones-80-trillion-opportunity/?sh=b1deeaf105f3