Blackstone, the mammoth alternative asset manager, has come a long way from its rather humbler beginnings. The firm was founded in 1985 by Stephen Schwarzman and Peter Peterson with $400,000 in seed capital.
It’s come a long way, baby.
When the firm had its IPO in 2007, it had around $70 billion in assets under management. On the group’s second-quarter 2023 earnings call, Schwarzman could hardly suppress his giddiness over the fact that it had now surpassed $1 trillion in AUM, a promise it made in a 2018 investor day and three years ahead of schedule.
“I feel a huge source of pride,” he said. When Blackstone debuted, it took an advertisement out in the newspaper, heralding the firm—an almost classified to raise money. “We thought the phone would ring off the hook,” Schwarzman said. It didn’t, at least right away.
From that time on, Blackstone began building up its book of business and today encompasses some 70 distinct investment strategies, with more than 230 distinct companies in its portfolio and some 12,000 real estate assets.
One of Blackstone’s biggest advantages is it holds vast reams of data that it’s able to harvest from all its investments. It’s why and how the firm has over time developed its thematic investment platform. “We have so much data that helps us identify trends before others and where to invest client capital. It’s more info than anyone competing with us,” Schwarzman said.
ACE IN THE HOLE
Another Blackstone advantage: Jon Gray, president and COO, who has attained a quasi-mythical status in his time at Blackstone having, for example, spearheaded the leveraged buyout of Hilton, a deal that netted $14 billion in profit when Blackstone fully cycled out of it in 2018.
Gray is seen as the potential heir apparent to Schwarzman as CEO one day. For now, he is the firm’s biggest, most-listened-to-and-in-demand voice (watch him give the Trinity School commencement speech).
He had propitious news to report during Blackstone’s Q2 call and offered some guidance on what’s to come.
For the quarter, Blackstone pumped out $601.3 million in net income compared to a $29.4 million loss at the same time a year ago. Total revenue was $2.81 billion in the quarter, a 77% increase over Q2 2022.
With some $200 billion in dry powder, Blackstone should look to further deploy its balance sheet as the year moves forward across the many sectors it invests in, from logistics and student housing to hospitality and data centers. Especially if you subscribe to Gray’s thinking that market fundamentals should flip back favorably in the coming months. “There are strong signs of inflation decreasing,” Gray said.
Somewhat a surprise is the dearth of distress assets in the market, something Gray attributes both to strong company performances and earnings and less leveraged positions throughout the financial system. “Everyone is surprised at rate raises by the Fed and not more distress,” he said, adding that default rates are still below the long-term average of 3% and that during the Great Financial Crisis, default rates were up to 14%.
Gray is smart, but he’s not a soothsayer—that we know of. “If the economy does moderate and [interest] rates stay elevated, we may see more defaults,” he said, “but it’s not like the over leverage we saw in 2008/2009.” Consider Blackstone’s BCRED, its non-exchange traded business development company, which saw loan-to-values (LTVs) at around 43% on its book and much of it originated prior to the rate hike. That’s in contrast to the the 70-plus-percent LTVs during 2006 and 2007. “Things could get tougher, but not as bad as last cycle,” Gray said.
Around 50% of Blackstone’s real estate holdings are in three sectors: logistics, student housing and data centers. Only 2% is concentrated in the battered office segment. “There continues to be a big bifurcation in commercial real estate,” Gray said. “Certain sectors face headwinds.”
One major benefit for owners is the lack of new supply throughout the commercial real estate market, some of which is due to the lack of new projects getting underway due to the current rate environment. “There is a sharp decline in new supply,” Gray said, citing logistics (new starts down 50%), housing (down some 20%) and hotels. Constricted supply also gives owners and operators of assets the confidence to either raise rates or keep them at lofty levels. “There is significant opportunity coming out of this to invest in places where there are underlying vacancies, in a lower rate environment, with less building [supply],” Gray said, adding that Blackstone is right now most active in European logistics.
BREIT, Blackstone’s non-listed REIT that invests primarily in stabilized income-generating commercial real estate investments across asset classes, has had a net return of 12% over the past 6-plus years, three times the public REIT market, Gray said. BREIT redemptions were down nearly 30% in June, the lowest rate since a January peak.
“That performance drives people to come back,” Gray said.