US private equity giant Blackstone is gearing up to become not just an alternatives investment manager but one that is heading in the direction of being a large-scale money manager, writes Robin Marriott, editor of PropertyEU CapitalWatch.
Readers will be aware of Blackstone carrying out large real estate deals in Europe left, right and centre. They will also understand that the company has broadened the product range from opportunistic property funds to core, and core-plus. Furthermore, investors in these traditional ‘draw down’ funds are institutional, as they will know.
But what does the future look like for this company, having reached a point where many of its institutional products in real estate, private equity and other alternative asset classes have become oversubscribed? How does it achieve long-term growth on top of what it has managed in the recent past?
That was the theme of the firm’s third-quarter analyst call on October 19 which journalists could snoop on, including yours truly. Two subject areas in particular stuck out: tapping retail investors and adding more liquid or semi-liquid investment vehicles to the overall mix.
Elite group
Blackstone, it seems, is gearing up to become not just an alternatives investment manager but one that is heading in the direction of being a large-scale money manager. CEO Stephen Schwarzman talks about heading towards an elite group that would include the likes of BlackRock and Fidelity.
It has already come an extremely long way. When it started out in 1985, commitments from investors were $5-10 mln apiece. Now consider that capital inflows for the third quarter alone reached $19 bn! This firm has evolved into one that can secure a single commitment of $20 bn from Saudi Arabia’s Public Investment Fund – in that case to a new infrastructure platform. It has enjoyed phenomenal success in building AUM – by 7% to $387 bn in 2016. However, it still has a long way to go to ever compare with the largest money managers in the world, which control nearly $6 trn and over $2 trn in the two examples mentioned.
The plan at Blackstone is simple if not challenging and time-consuming: to introduce both as wide a product range as possible and to broaden its investor base as much as feasible. Behind the scenes, the firm is capitalising on brand recognition to those that distribute financial products to retail investors. It is growing its in-house team to work with national integrated brokers (wire houses), banks, independent broker-dealers, suppliers of individual retirement accounts (IRAs), and family offices. It has just started to grow a team focussed on that family office segment.
Retail investors
These are early days; the strategy so far has led to retail investors representing 18% of its overall AUM, but its penetration in this potentially huge reservoir is just 20% among its financial advisors and 5% across the whole industry.
One can see the evidence of tailoring products to capture this universe of investors. Last year Blackstone launched BREIT, offering individual investors access to stabilised US commercial property and debt and it has since progressed to acquire around $3.2 bn of assets, 66% of which is multifamily.
On the analyst call, the company talked about working with firms to access the affluent and those in the $1-5 mln range. The lure of creating more products is big because the potential is big! Some of this retail investor universe has been dramatically under-allocated to alternatives. The issue is that regulations hamper efforts to capture retail investors because of concerns over illiquidity of traditional private equity-style funds. That is why the opportunity lies not just in forming a sales network to tap the market but by creating liquid and semi-liquid products for them.
Pyramid
Blackstone has realised two things perfectly well. First, global investing is like a pyramid. At the narrow peak are higher returning, higher risk investments. Below that, the lower you go the broader the investment opportunity with income characteristics that appeal to lawyers and dentists and wealth brackets above.
Second, the structure of traditional drawdown funds isn’t pre-set to make the most money over a longer time frame. You can be a lot richer if you hold an asset for 10 years earning 12% than if you hold asset for four years earning 25%.
Expanding its product range to greater and greater liquid products will get Blackstone a little off the treadmill of traditional funds and provide a route for compounding AUM growth that its investors and shareholders will benefit from.
