Forbes - Blackstone's trillion-dollar dreams

Kevin Dowd

Staff Writer

January 30, 2022

Big Things

1. Blackstone's trillion-dollar dreams

At an investor day way back in September 2018, firm president Jonathan Gray put a number on Blackstone’s vast ambitions. Gray and his colleagues would aim to reach $1 trillion in assets under management by the year 2026, he declared, up from $439 billion at the time—a leap that would take the biggest private equity firm in the world into even more rarified air.

“You may ask … have you tapped out? Are you hitting some ceiling? The answer to that is a definitive ‘no,’” Gray told his shareholders.

In the years since, he’s been proven correct. In fact, he’s been proven more correct than even the firm’s most optimistic backers might have guessed.

Blackstone reported its earnings for the fourth quarter of 2021 this week. The numbers included a stunning $150 billion leap in the firm’s asset base in a mere three months, taking that number to $881 billion. Blackstone now expects to reach $1 trillion in assets at some point in 2022—four years ahead of its original timeline.

“We had our best performance in our history, and we continue to broaden our platform, investing with retail investors, insurance and so forth. And that’s giving us powerful momentum and record results,” Gray said in an interview with Bloomberg.

As Gray indicates, the firm’s dedication to perpetual capital is one reason for its explosive growth. About half of the cash that came into its coffers during the final quarter of the year was due to insurance deals that will see Blackstone begin to manage assets on behalf of Allstate and AIG. Rivals Apollo Global Management and KKR have also both pushed their chips into the insurance sector in recent years, although in different ways.

These private equity powerhouses continue to move away from their buyout roots and embrace a different kind of investing—a model where they don’t have to return so much capital to outside investors, and thus, a model where the fees never stop. Overall, Blackstone now manages $313 billion in perpetual capital, up 132% compared to this time last year.

The jaw-dropping growth in assets wasn’t the only reason for Blackstone investors to celebrate this week. The firm reported $2.3 billion in distributable earnings and $1.8 billion in free-related earnings for the fourth quarter, with both of those numbers marking all-time highs. The former figure equates to $1.71 per share, blowing past analyst estimates of $1.37 per share. And the latter represents year-over-year growth of 144%.

Other numbers reflect the massive scope of the firm’s activity last year. It was the busiest year ever for the private equity industry as a whole, and Blackstone was no exception. The firm deployed $144.4 billion and realized $77.2 billion, with its overall cash inflows for 2021 topping $270 billion—a sum larger than the gross domestic product of Portugal.

What did it all mean for the firm’s LPs? Blackstone’s corporate private equity platform registered 4.8% appreciation during the fourth quarter and 42.2% for the full year. For its tactical opportunities arm, those numbers were 11% and 34.9%. The best results, though, came from Blackstone’s opportunistic real estate business, which logged 12% appreciation in the fourth quarter and 43.8% for the year.

Data centers are one are of the real estate market where Blackstone has stayed busy. The residential rental market is another. Just this week, the Blackstone Real Estate Income Trust agreed to buy an apartment portfolio comprising more than 12,600 units from Resource REIT for some $3.6 billion. In December, the firm spent $3.7 billion on another 11,000 rental units owned by Bluerock Residential, and last summer, it paid $6 billion for Home Partners of America and its portfolio of some 17,000 rent-to-own homes.

The first 11 months of 2021 were a very good time to be a Blackstone shareholder. The firm’s stock price climbed more than 120% between the start of the year and late November, taking its market cap north of $150 billion. Things changed in the final weeks of the year, though, as red-hot private equity stocks were hit hard by a chill in the market. Between early December and early this week, the firm’s shares were down more than 20%.

This week’s stellar results brought another reversal, however. Blackstone stock soared more than 11%, recovering nearly a full month’s worse of losses.

As you can imagine, Blackstone’s executives were in an ebullient mood on this week’s earnings call. We’ll give the last word to Stephen Schwarzman, the firm’s chairman, cofounder and chief executive, who’s spent the past 37 years building Blackstone into the world-eating colossus it is today.

“Today, Blackstone reported the most remarkable results in our history in nearly every metric,” Schwarzman said. “No other alternative firm in the world has approached this level of absolute growth in a single year.”

2. Disclosures

The SEC wants more transparency from big private companies. It wants the same thing from private equity firms. The regulatory agency voted this week to issue a new proposal calling for a significant increase in the financial disclosures required by private equity firms and hedge funds. Specifically, the amendments would involve the information investors disclose via Form PF documents, calling for firms to report any adviser-led secondary transactions, clawbacks or other notable developments within one business day. The SEC also wants more firms to have to make such disclosures, proposing to lower the required reporting threshold from $2 billion in assets under management to $1.5 billion.

These sorts of proposals won't win many fans on Wall Street. Of course, that isn't the point. SEC chair Gary Gensler said the changes would allow the SEC to do a better job of spotting risky behavior in private markets that could prove systemic. It's the latest sign that, across multiple agencies, a new regulatory day has dawned in Washington under the Joe Biden administration.

3. Chip shots

More than 16 months later, regulators on three continents still seem very skeptical about Nvidia's plans to acquire Arm in a cash-and-stock deal that was worth some $40 billion when it was first announced in September 2020. So skeptical, in fact, that Nvidia now plans to walk away from the deal, according to a Bloomberg report from this week, with ongoing antitrust resistance in the U.S., Europe and China looking like too big a challenge to overcome. Instead, current Arm owner SoftBank is now said to be ramping up plans to take the company public through an IPO.

Another major semiconductor merger, though, appears to be a go. Chinese regulators gave their conditional approval this week for AMD to proceed with its $35 billion acquisition of Xilinx, removing the last major obstacle for a deal that was first announced in October 2020—mere weeks after Nvidia and Arm's ill-fated combination. With Xilinx and its technology, AMD will aim to intensify its competition with Intel in the market for chips used in data centers.

4. Millionaires, not billionaires

I wrote a story this week about Moonfare, a startup founded by former KKR managing director Steffen Pauls that's trying to become a key cog in the private equity's push to win over retail investors. Moonfare launched its platform this week in the U.S., allowing accredited American investors (those worth at least $1 million or with $200,000 or more in annual income) to buy direct stakes in a range of private equity and venture capital funds from notable firms. For those firms, one obvious appeal is the chance to start building exposure to a class of wealthy individual investors that could help fuel the private equity industry's next generation of growth.

The past week also brought another develop that underscores the opportunity private equity firms see among retail investors. KKR announced the hire of Todd Builione as its global head of private wealth, a newly created position that will aim to grow the firm's business with wealth individuals, investors that KKR executive Eric Mogelof believes are "poised to significantly increase their allocations to alternatives in the coming years."

5. Animation domination

A studio called DNEG has won six of the last 10 Academy Awards for Best Visual Effects, including last year's trophy for its work on "Tenet." Now, DNEG is moving to the public markets, as the company announced plans this week to merge with a SPAC called Sports Ventures Acquisition Corp. at an enterprise valuation of $1.7 billion. In just the past year, the London-based studio's work helped fuel works such as "Dune," "No Time to Die" and "The Matrix Resurrections." The move comes less than six months after DNEG raised $250 million in funding from Novator Capital Advisers to expand into gaming and original content.

It's the second major deal in the past few months involving a major visual effects studio: In November, Unity Technologies agreed to buy most of the assets of Peter Jackson's Weta Digital for nearly $1.63 billion. Both DNEG and Weta have thus far made their mark in the world of film, but these days, their expertise in crafting unique visual worlds also has other applications. Unity, of course, is a giant in the video game industry that plans to use Weta's technology to help realize its metaverse ambitions.

6. Lockheed's rocky road

The American aerospace and defense industries have been defined by consolidation over the past several decades. Lockheed Martin wants to continue the trend. A little more than a year ago, it agreed to buy Aerojet Rocketdyne for $4.4 billion. But the newly aggressive regulatory regime in the U.S. has different ideas: The FTC filed a lawsuit this week to block the proposed takeover, citing Aerojet Rocketdyne's status as the last independent manufacturer of missile propulsion systems in the U.S. The company also makes some of the massive engines used by NASA to launch its rockets.

Aerojet Rocketdyne is itself the product of some fairly recent (and fairly controversial) M&A. The company took its current form in 2013, when GenCorp bought Pratt & Whitney Rocketdyne for some $550 million and merged the business with its own Aerojet subsidiary. The FTC investigated the deal and found it would created a monopoly and likely lead to increased prices and decreased innovation, but the Department of Defense intervened and asked for the deal to be approved due to "highly unusual national security circumstances," and the FTC relented. The DoD released a statement this week saying that is has also been in communication with the FTC regarding the latest deal.

Lockheed Martin's bid to build out its rocket and missile business is running into opposition. Getty Images

7. Heart of Gold

Neil Young told Spotify to pick between him and Joe Rogan, and Spotify chose the latter. The streaming giant pulled Young's music off its platform this week after Young issued a statement calling Spotify "the home of life threatening COVID misinformation" due to its role as the owner and publisher of Rogan's podcast.

That might be interesting. But what does it have to do with M&A? Last year, Young sold a 50% stake in his song catalog to Hipgnosis Songs Fund and its leader, Merck Mercuriadis, becoming one of many aging artists to recently strike such a deal with investors. And despite the lost revenue that will ensue, it sounds like Young's stand has the full support of his new business partners. "I want to personally thank Merck and Hipgnosis for standing with me," Young wrote in a statement on his delightful personal website. "Losing 60% of worldwide streaming income by leaving Spotify is a very big deal, a costly move, but worth it for our integrity and our beliefs."

8. Resourceful thinking

Billionaire oilman Trevor Rees-Jones caught up this week with my colleague Chris Helman. The occasion? Rees-Jones agreed to sell his Chief Oil & Gas to Chesapeake Energy for $2.65 billion in cash and stock, marking the biggest deal of a career that's been full of big deals. This is Chesapeake's second major acquisition since emerging from bankruptcy nearly a year ago, following a $2.2 billion takeover of Vine Energy that closed in November. The shale pioneer filed for Chapter 11 in June 2020, amid the worst times of a pandemic crunch in he oil and gas industry. The purchase of Chief will add 113,000 acres in Pennsylvania's Marcellus Shale to the new-look Chesapeake's portfolio.

In a different deal involving a different global resource, the Viterra unit of Glencore signed on to buy the grains business of Gavilon for $1.13 billion, a bid by Glencore to build out its business in the American agriculture market. Gavilon is a U.S. subsidiary of Marubeni, a major Japanese trader. Karl Plume of Reuters took a look at how the takeover could be a sign of Glencore's ambitions to take on the ABCDs, the cohort of four companies that dominates the global grains market.

9. WeAcquire

Under the reign of Adam Neumann, WeWork was a frequent acquirer of all sorts of companies—those that had obvious applications to the office-rental business, and those that did not. That takeover activity has been on pause since Neumann's spectacular flameout. But it resumed this week, as WeWork announced a move to acquire Common Desk, a fellow provider of co-working and office rentals with a current footprint of 23 locations spanning 13 cities in Texas and North Carolina. The Dallas-based company will remain a separate subsidiary of WeWork once the deal is complete.

Recent days brought even bigger news from WeWork's most prominent backer. Marcelo Claure is stepping down from his position as COO at SoftBank, reportedly due to disagreements with CEO Masayoshi Son over his future compensation. The New York Times reported last month that Claure was seeking some $2 billion in compensation "over the next several years," while SoftBank believed "tens of millions of dollars at most" was a more appropriate sum. The Financial Times has a behind-the-scenes look at all the drama.

Things To Read

A Ford F-150 owner examines what the arrival of an electric version of America's most popular vehicle might mean for the future of the famed manufacturer—and for the auto industry writ large. [The New Yorker]

If you want to get into the weeds of the past two decades of American macroeconomic policy, this story on the evolution of Larry Summers is a thorough and fascinating place to start. [Intelligencer]

A small French company called Vaneva used to be in the business of breeding ducks. Now, it's doing battle with the omicron variant. [Forbes]

The global M&A market went wild last year, with deals in Europe, deals in the IT sector and overall deal activity all soaring to all-time highs. But it still wasn't quite enough to reach the $5 trillion threshold. [PitchBook]

Late last year, the U.S. added NSO Group and its Pegasus spyware to the nation's national security blacklist. But not before the FBI gave the world's most powerful cyberweapon a trial run. [The New York Times]

Why is downtown Los Angeles so far from the beach? There's "a saltwater answer and a freshwater answer." [Los Angeles Times]

After a year unlike any other for the industry, a survey reveals that many private equity firms started 2022 by looking inward. [Institutional Investor]

Quote Of The Week

"Even among the higher-caliber people, too much money has already been raised. The SPAC craze is over; I think we’re going to have a tremendous compression of the number of SPACs that go public."

-Greg Martin, managing director and cofounder at Rainmaker Securities, a broker specializing in pre-IPO stakes in private companies, speaking to Bloomberg about a surge in IPO withdrawals among would-be SPACs

Kevin Dowd

Staff Writer

I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf.

Follow me on Twitter.

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Forbes - Blackstone's trillion-dollar dreams

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