Private equity is on a never-ending hunt for more dollars to manage, with nearly as much focus directed to fundraising as investing. Historically, that meant time spent wooing large allocators like pension funds, sovereign wealth funds, and endowments — not anymore.
Last week, Blackstone announced it was resuming its plan to launch a corporate buyout fund comprised entirely of retail money, raising capital from high-net-worth individuals.
The fund, Blackstone Private Equity Strategies, or BXPE, will begin taking subscriptions later this year.
Wealth Management Keeps the Lights On
Blackstone President Jonathan Gray sees his burgeoning wealth management business as key to the firm’s continued dominance. BXPE is just the latest launch from the $240 billion AUM unit, which includes sister funds BREIT (real estate) and BCRED (private credit).
Making his case, Gray cites Morgan Stanley research:
“This is an $80 trillion market, with low single-digit allocations to alternatives today. Estimates [point toward] allocations rising to 10%-20% over time. This is further substantiated by the discussions we have with the major distributors, who tell us they want significantly more exposure to our products.”
Jonathan Gray, Blackstone President
The more money Blackstone manages, the more fees it collects. In an increasingly competitive institutional fundraising environment, retail is the logical choice to ensure continued topline growth. Already, retail-oriented funds contributed nearly half of Blackstone’s second-quarter fee-related performance revenue.
Often structured as perpetual funds, without a timeline to return capital, the retail vehicles provide steadily expanding earnings power and a highly predictable source of fees — exactly what shareholders want to see.
Managing Retail
Retail investors pouring money into Blackstone-managed funds are likely more sophisticated than your typical day trader. Even so, it’s still a markedly different LP profile than Blackstone is used to managing.
All that to say, Blackstone’s ascent has not come without growing pains.
Late last year, the firm faced a mini-crisis at BREIT, its flagship $70 billion property fund. A handful of redemptions from Asian investors, initially a minor issue blamed on tighter monetary policy, spiraled into a barrage of redemption requests after other investors got spooked.
Blackstone was forced to halt withdrawals in a last-ditch effort to avoid a fire sale of illiquid real estate assets that would have caused further contagion.
A public relations blitz from Blackstone leadership, including chiefs Steve Schwarzman and Gray, eventually put an end to the panic, though not before Blackstone's stock dropped nearly 20% (and the firm delayed the launch of BXPE).
So far, retail has proven a fickle investor base that’s prone to making emotionally driven decisions at the click of a button — very different than institutional LPs accustomed to fluctuating economic conditions and market sentiment.
Longer-term, retail reception of private equity’s notoriously pie-in-the-sky illiquid asset valuations remains a hurdle, particularly in scenarios where final portfolio company sales are substantially different than previous fund marks.
Blackstone’s Right-to-Win
While Schwarzman and Gray may not have envisioned themselves chasing after wealth managers, they do point to Blackstone’s global financial advisor network as a key differentiator.
The firm has built long-term partnerships with advisors and their underlying clients, working to lock up what they view as the next big frontier. The strategy has placed Blackstone meaningfully ahead of peers, though other asset managers have begun to make retail inroads (notably Starwood, Brookfield, and KKR).
Maintaining the edge takes a different set of skills than Blackstone’s historical strengths. The latest firm initiative? Roll-out of a recently launched brand awareness campaign, complete with the new tagline “Build with Blackstone.” It seems suburban moms and dads are now on the same footing as CalPERS when it comes to critical targets for brand recognition.
The New Blackstone: Returns At Scale
While BXPE is set to plug into Blackstone’s existing LBO machine, the strategy may not be core to the business for much longer.
This summer, Blackstone became the first private equity manager to hit $1 trillion of assets under management — a long way from its 1985 launch after founders Schwarzman and Pete Peterson managed to cobble together $400,000 of start-up capital.
Deploying today’s ballooned AUM is a daunting task and requires a very different approach than Blackstone’s corporate buyout bread and butter. To support growth, Gray has made a conscious decision to target larger markets, at the expense of lower returns.
While it may not sound as sexy to the average private equity investment professional, it does keep the management fees growing at a rapid clip (which is, again, very sexy to Blackstone shareholders).
“The size of the higher returning markets is not as big as if you move down the return spectrum to infrastructure, core-plus real estate, direct lending and private credit for insurance companies.”
Jonathan Gray, Blackstone President
Gray’s ultimate vision is a broadly diversified firm whose edge comes not from 30% buyout returns but from a core expertise in asset “distribution.”
What's Next?
Blackstone is set to join the S&P 500 on September 18th, the first alternative asset manager to make the cut. Given shareholder tendency to quickly forget prior accomplishments, the firm has now set its sights on hauling in the next $1 trillion of assets.
The rest of the private equity world is following suit. Going forward, don’t be surprised if you see retail intermediaries popping up, providing access to (HNW) mom-and-pop investors for managers without the reach and infrastructure of Blackstone. Think a placement agent, like PJT’s Park Hill unit, that woos financial advisors instead of pension funds.
Whatever the final logistics, expect private equity to continue their quest to secure an ever-bigger piece of the pie.