Side Letter: Blackstone’s Gray on PE’s ‘sea change’; Wisconsin’s breathing room

Side Letter has got its hands on a sneak preview of PEI's upcoming interview with Blackstone president and COO Jon Gray. Plus: Why LPs facing allocation issues should pay attention to Wisconsin and impact investing gets a new measurement tool. Here's today's brief, for our valued subscribers only.

Just happened

PE’s ‘sea change’
The opening of private markets to retail investors and a growing number of partnerships with massive insurance companies represent two of the biggest sea changes for private markets fundraisers. Blackstone, the world’s largest firm according to the PEI 300, has plans to capture both – that’s according to president and COO Jon Gray, who sat down with Private Equity International for April’s upcoming cover story, out Friday. Side Letter has got its hands on an advance copy – here’s an excerpt:

The second element of the sea change is increased inflows from insurance companies. In July, Blackstone agreed a deal to manage $50 billion of AIG’s life insurance and annuity capital, rising to around $100 billion over the next six years. Blackstone also acquired a 9.9 percent stake in AIG’s life insurance and retirement services unit. Blackstone receives a steady, predictable fee stream – much valued by equities analysts – while AIG gets access to higher-returning alternative investments.

While more tie-ups of this kind are inevitable, Gray rules out merging with an insurer in the way that Apollo did with Athene: “We want to run a business that’s asset-light. We have a very small balance sheet, virtually no net debt and no insurance liabilities… We also want the ability to serve multiple insurance companies,” he says, adding that perpetual capital would complement, not supersede, its closed-end funds.

Blackstone’s perpetual capital drive has led it to pioneer a process described by PEI as a “secondaries deal without the secondary”. In February, it completed a €21 billion recapitalisation on European logistics company Mileway, in which existing investors were given the option to sell, roll with the asset or roll with an increased stake. The perpetual Blackstone Core+ real estate fund also backed the deal, turning a company acquired by a closed-end vehicle into a perpetually held asset. It did the same thing with life sciences business BioMed Realty in 2020, in a €14 billion deal.

Keep an eye out for the full interview tomorrow.

While we’re on the subject…
PEI‘s Carmela Mendoza will have a story today about Blackstone’s private wealth unit, which is seeing rising rates as a boon for inflows in Europe. “Individual investors are concerned about their fixed income portfolio due to increasing rates,” Rashmi Madan, head of EMEA in Blackstone’s Private Wealth Solutions Group, notes. “That is why they are looking to diversify into alternatives and private credit with floating-rate income, which could benefit from a rise in rates.” HNW individuals in Europe in particular are a “real opportunity” for the firm, Jon Gray said during the firm’s January earnings call. To capture that opportunity, the firm is creating products that “offer yield and an element of liquidity” that is not seen in traditional alternative drawdown products.


Wisconsin’s breathing room
Few institutions encapsulate the tricky situation facing LPs this year better than the State of Wisconsin Investment Board. The $141.5 billion pension ended 2021 with $10.6 billion of PE assets, a staggering increase of 47.5 percent from the previous year, affiliate title Buyouts reports (registration required). Performance was driven in part by strong gains in its growth equity portfolio, which represents about 8 percent of the PE portfolio.

Unlike some of its peers, SWIB has acted quickly to avoid becoming overallocated. The pension increased the range around its allocation towards private debt and PE to 5 percent in either direction to prevent it from having to offload assets to rebalance the portfolio. Others, however, may have less flexibility, and could be left substantially overexposed to the asset class.

The issues affecting Wisconsin are happening at a tricky time, given that the Ukraine crisis, inflation, plus the spectre of and actuality of interest rate hikes have raised public markets volatility and the threat of a simultaneous denominator effect. Against this backdrop, Wisconsin’s allocation cushion appears a prescient move.

Made to measure
How do you measure impact? It’s a question that many have raised in recent years, and one that seems to have yielded few consistent answers. Enter: the Global Impact Investing Network, which has launched a prototype version of an impact performance benchmark described as a “first-of-its-kind”, affiliate title New Private Markets reports (registration required). The benchmark uses a digital platform developed by the impact reporting initiative IRIS+ and is now available for a select group of investors to demo. Thirteen asset managers including LeapFrog Investments and TIAA-sponsored Nuveen submitted data to GIIN to build the impact benchmark’s beta version.

GIIN said it plans to launch more impact benchmarks targeting specific sectors, including agriculture and energy. “Our goal is for impact performance benchmarks to play the same role that financial benchmarks play in investing, which is to create a mechanism by which investors can push themselves to achieve superior performance,” GIIN co-founder Amit Bouri said in a statement.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Jordan Stutts