Blackstone and Private Equity Trend

Blackstone Group’s total assets rose to $119 billion at the end of September from around $111 billion (including non-fee earning assets) in the previous quarter.  Look at the disaggregated numbers and you see a strong trend.

Originally a private equity firm, Blackstone is increasingly moving away from that asset class. It is now more of a hedge fund and real estate investment vehicle. Other large private equity firms like Carlyle also look to diversify. 

Blackstone’s fee-earning private equity assets were down slightly to $24.3 billion compared to a year ago. That may not be important in itself. But compare it to Blackstone’s credit and marketable alternatives business, which includes fund of hedge funds. Assets grew 17% from a year ago to $55.6 billion (including separate accounts and $3.5 billion in acquired collateralized debt and loan obligations).

In short, the company now has more than twice the money in hedge funds and other liquid investments than it has in private equity. Real estate is another avenue of diversification.

Blackstone chief executive Stephen Schwarzman says more and more investors want hedge funds. He expects this to be an enduring trend.

Institutions have been moving their alternatives allocations from private equity to hedge funds for years. The 2008 crisis intensified the trend because it highlighted the pain of illiquidity— institutions, in particular university endowments, found themselves with private equity commitments that they no longer wanted to hold but had a hard time selling.

Frozen hedge fund redemptions contributed to the problem as well, but hedge funds are generally much more liquid than private equity.

Mr. Schwarzman said endowments are not allocating to private equity, state funds account for about half of the firm’s private equity clients and investors are reducing the number of private equity managers they use.

Blackstone is a shrewd caller of markets—remember how they timed their initial public offering near the stock market peak? The growing diversification to hedge funds is good news for fund managers.

Not that private equity is going away. Its returns look very good compared to long-only public equity, still down 20% to 25% from the peak, as  Mr. Schwarzman noted.  Major players like Blackstone benefit from investors consolidating their private equity holdings.

And the increased demand for hedge fund strategies does not help everybody. Top-tier funds of funds are raising money while the lowest tier is gone, says Boris Arabadjiev, chief investment officer of the Credit Suisse fund of hedge funds group.


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