Blackstone’s PE portfolio down 21.6% as market rout takes toll

The firm received net inflows of $27bn, including almost $5bn in the last two weeks of March for its latest core private equity fund, according to its earnings announcement Thursday.

Blackstone’s private equity portfolio fell in the first quarter as the economic impacts of the covid-19 pandemic and severe dislocation in the energy market took a toll.

Corporate private equity declined 21.6 percent in the three months to end-March and 17.3 percent in the last 12 months. Excluding energy, the portfolio declined 11.1 percent in the period.

“Impact of covid on companies and their outlook has been broad-based across the overall economy, as well as our portfolios, but energy was by far the largest detractor” in both private equity and private credit, chief financial officer Michael Chae said on the firm’s first quarter earnings call on Thursday.

“We can’t underscore enough that the decline reflects unrealised marks taken at a point in time of severe dislocation,” said Chae, describing the precipitous drops in the S&P 500 and high-yield debt and leveraged loan indices as “one of the most violent and swift declines in public markets on record”.

“Our first-quarter results were based on marks taken in the immediate wake of this. Although markets remain volatile, they’ve rebounded meaningfully off their lows. Indeed, in the first three weeks of April, our public stocks in corporate private equity have increased 20 percent.”

Despite the challenges faced by the current portfolio, it was a strong fundraising quarter for the firm. Private equity had inflows of $8.9 billion, compared with $8.3 billion for Q4. This included $4.8 billion for the initial close of the firm’s second core private equity fund, all of which was raised in the last two weeks of March. Blackstone also raised $4 billion for its first dedicated life sciences fund, which has a hard-cap of $4.5 billion, according to president and chief operating officer Jonathan Gray.

“Given the market turbulence, we expect fundraising to continue, but now at a slower pace,” Gray said. “We believe the secular shift to alternatives, and Blackstone in particular, will continue. Investor desire for better returns should be stronger than ever.”

Both Gray and firm co-founder and chairman Stephen Schwarzman said not being able to travel has yet to have an impact on fundraising. Schwarzman recounted a planned due diligence meeting for a fund that was expecting up to 150 LP attendees, which was switched to a Zoom meeting.

“Much like the rest of the way we’re all working, everybody was pretty adjusted and cool about that.”

Schwarzman said one of the advantages of being a long-established firm is “everybody on our side of the table knows everybody well on the other side of the table, virtually every institution in the world”.

“Now, with this whole distance of communication, it’s quite easy to get somebody on the phone anywhere in the world and talk to them and see them. That bond of trust that you have that’s developed over decades really becomes exceptionally useful in a situation like this.”

Both Schwarzman and Gray stressed the amount of dry powder the firm has to hand – $151.5 billion – giving it firepower to take advantage of the market environment.

Gray said the firm is already seeing “actionable opportunities” from the market dislocation, initially in structured credit and liquid market. Since the crisis began, Blackstone has bought $11 billion of public equities and liquid debt.

“We’re also beginning to see some rescue situations, although distress takes time to play out,” Gray said, adding that Blackstone is looking for businesses that are “cyclically, not secularly, under pressure”.

“These post-crisis investments should lay the groundwork for attractive future realisations.”

Around $30 billion of the firm’s dry powder is reserves for funds that have completed their investment periods.

“Our funds are designed with significant reserves which allow us to support investments even in the most challenged sectors today – energy, hotels and location-based entertainment – through additional capital where we believe the risk-return is appropriate,” Gray said.

The firm’s private equity arm put $5.5 billion to work in the quarter, and committed an additional $3.8 billion. Realisations stood at $2 billion for the quarter.

Gray said he expects “limited realisations in the near term”.

“Right now, in this kind of environment, it’s not a great time to sell assets.”

Blackstone’s overall assets under management dropped to $538 billion at the end of the quarter from $571 billion at the end of 2019. Distributable earnings were down to $557 million for the quarter from $914 million in Q4.