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Blackstone welcomes LP manager concentration

More limited partners want to form ‘strategic relationships’ that are long-term and involve exposure to multiple strategies, co-founder Steve Schwarzman said during an earnings call this week.

The idea of limited partners focusing on manager concentration in their private equity portfolios may give some GPs anxiety, but not The Blackstone Group.

Blackstone, in fact, benefits from LPs committing capital to fewer managers, said the listed firm’s co-founder and chief executive officer Steve Schwarzman during a second quarter earnings call Thursday.

“The fact that our firm can provide … private equity, real estate, hedge fund solutions and credit allows an LP who is trying to consolidate relationships and lower their own costs and improve their performance to focus more assets with us, and form a strategic relationship with us,” Schwarzman said.

In general, many private equity LPs have been working to trim down the sizes of their private equity portfolios, culling their manager relationships to make their programmes more manageable. The California Public Employees’ Retirement System revealed earlier this week that it has been working on concentrating its portfolio through secondary sales and will continue to do so.

“The goal is always to focus on top quartile performers, and we’ve used secondary sales as part of this consolidation strategy to keep the line-up manageable and eliminate redundancy of also-ran funds,” a CalPERS spokesperson told Private Equity International in a prior interview.

The fact that our firm can provide … private equity, real estate, hedge fund solutions and credit allows an LP who is trying to consolidate relationships and lower their own costs and improve their performance to focus more assets with us.

Steve Schwarzman

Other LPs are using the secondary market to manage their portfolios as well, though Blackstone is not likely to be on the losing end of that process. The firm revealed during the call significant increases in its private equity earnings in the second quarter, driven by rising valuations in the underlying assets in its funds and increased management and performance fees.

LPs have shown their support for the firm by handing over more than $16 billion in commitments to Blackstone’s sixth buyout fund, which has not yet officially closed.

Despite the fundraising haul, the firm has seen LPs leaning more toward “targeted” funds and away from more generalist investment vehicles, Schwarzman said. LPs are not likely to continue making “historic” size commitments, and so the industry may not see another fund the size of Fund VI again for a few years, Schwarzman said.

“When the overall size of an endowment is down, or a pension is down, you can’t write the same size tickets, you’re fighting that type of issue,” he said.

With more than $17 billion in private equity dry powder, Blackstone is well-positioned to pounce on opportunities. The firm is keeping watch in Europe, particularly in the mid-market, which doesn’t have the same kind of deal competition as the larger end of the market, and where financing is not as available, the firm’s president Tony James said. In the US, the firm has been having “spectacular success” with energy investments, especially as Blackstone has “gotten closer to the natural resources themselves and away from the corporates”, he said during the earnings call.

The firm has also been working on “platform build-ups”, in which it finds a management team and backs the team to create a company, James said.

At the end of trading Thursday, Blackstone’s unit price had risen 74 cents to close at $17, boosted perhaps by the good second quarter news. Blackstone went public in 2007, but its share price has never climbed back to its debut of $31 per unit.

The firm went public to have “access to capital and markets to fuel our growth”, James said during the call, adding there is no “misalignment of interests” with the firm, its LPs and its unitholders. Blackstone first and foremost works for its LPs, he said. “Without LPs, there is no Blackstone. We’ve never been focused on gathering assets; everything we do is based on investment performance for LPs.”