Just how big is Blackstone's private equity portfolio?
If Blackstone Private Equity were a corporate holding company, and the investments it has in other companies were aggregated, the sum of those assets would make Blackstone Private Equity the 17th largest Fortune 100 company. If you tighten the definition, for those investments over which Blackstone has a high degree of influence, it's still 85th in the Fortune 100.
If I were the CEO of a Fortune 100 company, what kind of structure would I want to have to keep track of those divisions? That gives you a context for thinking about the importance and value of portfolio management at Blackstone.
How involved will you be in the actual management of the portfolio companies?
You want to have visibility and transparency on performance of management, and you want to be able to monitor and keep track of what is promised and delivered. To the extent that there are deviations from your original investment thesis, that can be a source of wanting to have a dialogue with management.
But at the same time you don't want to, nor can you, be a direct manager yourself. “Shadow management,” where you are essentially telling managers and CEOs what to do, is not a good model.
What can be done to realise economies of scale within the Blackstone portfolio?
There are quite a number of supportive things you can do – the sharing of best practices that cuts across the portfolio; shared infrastructure in terms of financing; synergies on purchasing, where you can bring to bear a higher degree of scale by virtue of combining assets that wouldn't otherwise be combined.
To what extent has Blackstone already pursued, for example, purchasing power across its many portfolio companies?
Blackstone probably wouldn't be much different from all of the other major private equity firms in not having gone very far down that track. We're very early in the process of bringing that kind of scale and organisation. This is largely because you need a central authority and a central organiser to bring that together.
What are some of the more obvious volume discounts to go after?
Clearly insurance is on top of the list. You have escalating insurance premiums in a very tight market. [Directors and officers] insurance has gone through the roof; property casualty premium prices have gone up. If you work properly with risk management, you can bring to bear a greater degree of scale and therefore a greater degree of cost reduction. It's risk minimisation for the same price.
Health benefits is another one. That's a business that just flat-out is scale driven by the number of lives that are under management. If you expand the number of lives, you reduce the cost per life.
But one has to be delicate in changing those relationships that already exist. The economics have to be there, the transition has to be there, and compelling evidence has to be available.
Are there any established models you can look to in building a system for overseeing a private equity portfolio?
There are many parallels to an extremely well managed public company like GE, or companies of that magnitude where there is strong management at each of the divisions. In the corporate world, there is very much of a portfolio management role going on, with best practices being applied across the portfolio. There are monitoring skills across the divisions. They actually have dashboards they use to monitor the portfolio.
This is a longwinded way of saying, no, there aren't any precedents. And I think that private equity has struggled as a result, meaning that there are no clear templates where you can go out and say, “Here's the way to do it.” As a consequence you'll find there are quite a number of models for portfolio management inside the private equity industry.