Private Assets, the ultimate form of active management: Myth or Reality?

Jonathan Gray, president and chief operating officer of US private equity group Blackstone spoke recently to Pictet Wealth Management’s Chief Investment Officer César Pérez Ruiz about the macro background and how the market for private assets is changing.

According to Blackstone’s president and chief operating officer, Jonathan Gray, inflation could prove stickier than many economists are predicting. Central banks will have to accelerate their responses and long rates will continue to move upwards

Higher borrowing costs have obvious implications for leveraged private-asset vehicles and so, according to Gray, “you need to buy businesses where cash flows will grow to offset this multiple compression that we expect.” In real estate, for example, this means tilting towards short lease free-market rentals and investing more in logistics, particularly “last mile” infrastructure such as warehouses, exploiting the trend to “online everything”.

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Gray hails the “democratisation” of private investments. He feels it still has room to go, pointing out that the alternatives business today, excluding hedge funds, is around USD8 trn compared with the USD250 trn value of stocks and bonds. The market for private investing is widening inexorably, with low rates persuading investors to sacrifice some liquidity in pursuit of higher returns, says Gray. Blackstone has responded accordingly, broadening its appeal to private investors.

At a sectoral level, Blackstone is cautious on distressed debt, according to Gray (“There aren’t a lot of wonderful companies with distressed balance sheets”). Outside China and India, a few emerging markets have proved challenging through rule of law issues, currency fluctuations and lack of liquidity.

On the positive side, Gray is a big believer in the green transition. Infrastructure will grow, “offering good yield and protecting for inflation”, he says. Life sciences is another area receiving Blackstone’s attention, with Gray signalling the intersection between data science and health care as offering immense potential.

The energy transition is a major thematic focus for the firm, with Gray pointing to Blackstone’s commitment to reduce carbon emissions in each new investment by 15% in three years. One challenge is the high price of green energy investments. The Blackstone strategy is to gain exposure by investing “one derivative off”, for example in the distribution of energy infrastructure.

The speeding up of innovation is another burning issue. But I think a bigger risk is not anticipating what is coming.

The same strategy applies to other favoured thematics, such as the migration to online: “That means looking at warehouses, digital infrastructure such as fiber cell towers, data centres, as well as content providers,” according to the Blackstone President.

Gray admitted that some aspects of the business were growing more challenging as abundant liquidity pushed up the purchase price for private assets. Nevertheless, one source of the private investment proposition – flourishing entrepreneurship – seems assured, as Gray the barriers to entry fall. “Today, a start-up can go direct to consumers via Amazon and build a USD50 million business”, he says. The speeding up of innovation is another burning issue. “Yes, the speed of innovation is a risk,” says Gray, “because the pace of change is higher. But I think a bigger risk is not anticipating what is coming.”

Gray acknowledges that as it grows, the private equity industry has proven its staying power. He points to the way it “weathered the financial crisis and covid storms and helped to disperse risk”. As for wider risks, Gray says that the industry needs “to make clear we are a force for good—what we do for decarbonisation and job creation are cases in point”.

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