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By Breakingviews
Leveraged buyouts have become a drag. KKR, Carlyle, and others are enduring a slump in the wheeling and dealing of companies because of higher interest rates and tumbling valuations while emergent businesses in credit, real estate, and infrastructure generate more of the steadier fees desired by investors in publicly traded shares of private equity firms. Blackstone’s latest fund tries to crack this new code.
In a sense, the $150 billion shop led by Stephen Schwarzman is refocusing on its roots. Blackstone once relied almost exclusively on raising captive pools of money from big pension and sovereign wealth funds for buyouts. The new Blackstone Private Equity Strategies Fund, known as BXPE, targets rich individuals instead, charging 1.25% to manage their money and keeping 12.5% of any investment gains beyond a 5% return threshold. It will span midsize takeovers to venture investments, but unlike traditional buyout funds, there is no set timeline to return capital.
This structure ensures a dependable flow of fees. Blackstone disclosed on Monday that it had raised more than $1 billion for BXPE, but similar real estate and private credit endeavors may speak to broader ambitions. Its BREIT property fund has accrued $62 billion in net assets while BCRED controls a $51 billion hoard of investments in corporate lending. With fee income valued at a multiple of 24 times, according to Goldman Sachs analysts, compared to just 8 times for deal-related returns, it’s no wonder Schwarzman wants to squeeze some buyout business into a different box.
Quickly stockpiling assets would be risky, however. Undeployed cash is a drag on performance. And BXPE will seek to co-invest with flagship Blackstone funds, potentially applying pressure on those managers to deploy the money, threatening an ill-fated spending spree that cuts further across the firm.
Private equity is also, by its nature, inconsistent. A consistently growing BXPE that doesn’t accurately reflect an emerging downturn could send investors running for the exits, as happened with BREIT in late 2022. Like that fund, BXPE limits redemptions, preventing a doom loop, but the impact can be severe nevertheless. BREIT is still limiting withdrawals.
Moreover, Blackstone’s rivals are also chasing stability. KKR reorganized its reporting structure in November, spotlighting “core private equity” investments intended to be held for longer, and has become a regular dividend payer. Traditional buyouts will come back, but the cycle is destined to continue. Smoothing out the peaks and troughs would be a real feat of financial engineering.
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Blackstone Private Equity Strategies Fund disclosed on Jan. 8 that it had raised an initial $1.3 billion in subscriptions. The fund, dubbed BXPE, is asset manager Blackstone’s first major foray into targeting affluent retail investors with a traditional private equity product. Companion retail funds BREIT, which focuses on real estate, and BCRED, which targets private credit, have grown to $62 billion and $51 billion, respectively. In late 2022, Blackstone paused an anticipated earlier launch of BXPE after it was forced to limit redemptions from BREIT amid a jump in withdrawal requests, the Financial Times reported.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
