At a time when the S&P 500 is returning not much more than 4 percent and bond yields are plummeting to historic lows, LPs will be anxious to know if private equity can continue to deliver the outperformance investors have come to expect. Blackstone's chairman and chief executive Stephen Schwarzman says yes.
Although Blackstone's portfolio companies have been posting earnings growth in the “low single digits” in the last five or six quarters, in line with a sluggish economy, Schwarzman told analysts during a second-quarter earnings call with analysts this week that he expects “the same returns in private equity that we've earned historically”.
In part, this is because Blackstone is pursuing diverse strategies in private equity, Schwarzman explained.
“We're doing more and more things in private equity that are not just buyouts of traditional mature companies that are traded publicly,” Schwarzman said. “If you look at where our money is going, there's a lot more build-up – where we take a small company and a great management team and assemble a national champion. There's a lot more investment in oil and gas exploration, [there's] greenfield building of infrastructure like-assets around the world…all those things are not in the EBITDA growth rate, because they're not mature sorts of companies where you measure it that way,” Schwarzman said. Nevertheless, such investments offer “extremely attractive returns,” he added.
The New York-based alternative assets giant reported record fundraising results, both in its private equity segment and across its asset classes. Total assets under management – which includes its real estate, credit, and hedge fund businesses – rose 7 percent year-on-year to an all-time high of $356.3 billion, driven by robust fundraising and “organic expansion”, the firm said in a statement.
In its private equity segment, total assets under management jumped 8 percent year-on-year to a record high of $99.7 billion on the back of strong fundraising. Blackstone raised $7.1 billion across its private equity business in the second quarter, counting the closings for its seventh secondary fund and the firm's first core private equity fund (Blackstone's $2.58 billion Core Equity Fund focuses on investments it can hold for longer than the typical five-year limit).
Private equity realisations during the quarter stood at $3.8 billion, while year-to-date the figure was $5.9 billion.
“There has been $3.17 billion [of assets] sold mostly in BCP V [Blackstone Capital Partners V]. Some companies have not sold as prices are not meeting exits yet,” Schwarzman said.
Blackstone Capital Partners V is a $22 billion vehicle that closed in 2007. The fund has a 1.5x multiple of invested capital and a 7.9 percent net internal rate of return (IRR) as of 30 September 2015, according to the California Public Employees' Retirement System (CalPERS) website.
Blackstone deployed $1.6 billion during the quarter and $3.6 billion year-to-date across its private equity funds, the firm said in a statement.
Schwarzman said that there may be opportunities for investment in Europe once valuations start to fall in the aftermath of Brexit. Just four percent of Blackstone's private equity investments are UK-based, Schwarzman said, and most of these assets are in real estate.
Nicole Idar Lee contributed to this report.