Why Blackstone is moving toward permanent capital

The firm’s COO Tony James sees the traditional 10-year private equity fund as ‘a bit of a treadmill’.

Blackstone plans to further expand permanent capital throughout its business lines, according to Tony James, president and chief operating officer at the firm.

“We have a growing number of permanent capital vehicles in each of our businesses,” James said during the firm’s third-quarter earnings conference call. “You should anticipate that we’re going to continue to evolve our business more toward that kind of vehicle because the traditional drawn down fund is a bit of a treadmill.”

James explained that with the traditional 10-year private equity fund, firms are often forced to sell good assets to return capital to investors while these assets could be worth more if they were held a few years longer.

“That seems counterintuitive in a way,” James said. “If you have a great asset that has a lot of future potential, why sell it and why not let it work for investors longer?”

He also explained that in a low interest rate environment, it can be challenging to achieve compounding returns, but extending the duration of the holding of assets can help boost that compounding.

“For example, you can be a lot richer if you hold an asset for 10 years earnings 12 percent than if you hold assets for four years earnings 25 percent,” he added.

Extending the life of private equity capital can also benefit Blackstone shareholders, contributing to the growth of assets under management and to a steadier carry.

Blackstone reported a record $387.4 billion in assets under management – including $102.5 billion in private equity AUM – as of the end of the third quarter, a 7 percent year-on-year increase. The firm noted on the call that it expects AUM to significantly surpass that number in the fourth quarter.

In private equity, Blackstone had $2.4 billion of realisations and invested $4.3 billion in the third quarter. Throughout the business, it deployed $10.9 billion in the third quarter.