Blackstone: private equity’s third wheel follows own course

Blackstone’s arch-rivals KKR and Apollo may disagree, but a strict fee-for-service business has worked out well for world’s largest alternative investment group. On Thursday it announced that assets under management had swelled to $650bn. Private equity managers have it good, taking a big cut of profits made using other people’s money. Blackstone does this so well, clients happily pay big incentive fees.

One year ago, the US group reported perhaps its worst quarter ever. After March 2020’s wipe out, private equity returns suddenly fell more than a fifth. The paper losses across Blackstone’s divisions were so bad that its accrued performance fee balance effectively halved in a single quarter.

Things have improved. That performance fee balance has shot up from $2bn to $5bn. One-year returns across the group have ranged between 20 per cent and 50 per cent.

KKR and Apollo, unlike Blackstone, have committed big chunks of their balance sheets to risk capital. That goes well beyond managing investments for a fee. The pair have acquired large insurance and annuities companies which help fund their credit investing businesses. 

The trio, however, do agree on one strategy: the future growth of the alternatives business is in so-called “permanent capital”, not finite-life, vehicles. Permanent capital avoids costly fundraising. Even if asset management fees tend to be lower, public market investors value those steadier fees more highly than erratic “carried interest” (investment profits). In the last year, Blackstone’s permanent capital base jumped by half, to about 25 per cent of its overall capital base.

Since the start of last year, Blackstone shares are up 50 per cent, well ahead of the S&P 500. The simplest and most important explanation is that all asset valuations have soared, and the group has skimmed its fair share from better-than-benchmark investment performance.

Shares in KKR, a smaller asset manager, have nearly doubled over that time period. If you take more risk in a rising market, you tend to outperform. That does not show Blackstone’s strategy is wrong, only that it is different.

The Lex team is interested in hearing more from readers. Please tell us what you think of the strategies of these three big US alternatives managers in the comments section below.