Blackstone on brink of $1 trn milestone in first for private equity

By Dawn Lim and Dave Merrill

Blackstone Inc. is on the brink of a milestone that no other private equity firm has reached: running more than $1 trillion. 
 

Analysts expect the firm to eclipse that mark when it reports quarterly results Thursday. It’s a far cry from the firm’s debut in 1985 — with $400,000 — marking one of the most dramatic transformations in modern markets. 

Private equity firms have risen to power major tracts of the US economy. Blackstone became the biggest of them all by venturing beyond its buyout roots, becoming an everything store for financial products outside stocks and bonds, and leading private equity’s shift into the vast world of alternative investments. That strategy stoked breakneck growth, with Blackstone roughly doubling its assets over the past five years.

“We started with one private equity fund,” Chief Executive Officer Steve Schwarzman, Blackstone’s billionaire co-founder, said this year. “Now we do 60 different things.”

Blackstone’s milestone ushers a new era. Firms that grew up during a dealmaking boom and easy-money policies face higher rates, stiffer competition and more public scrutiny.

Blackstone’s broad reach has raised its profile with regulators and lawmakers, as it touches everything from single-family homes to the business of cleaning meatpacking plants. The roughly 250 companies it backs stand to thrust it into the center of a debate over the societal consequences of more companies staying private rather than entering public markets.

Its dealmakers occupy key board seats and hold sway over companies across the US. They shape firms that determine how people find romance, secure a house and keep the lights on. As the biggest owner of commercial real estate, Blackstone has taken other property funds private in one fell swoop, swiftly gaining billions of dollars in apartments, data centers and even college dormitories.

President Jon Gray, Schwarzman’s heir-apparent, faces the challenge of managing the firm’s burgeoning influence. With a private-equity boom fading, he faces pressure from shareholders to keep growing an increasingly complicated business in unforgiving markets.

Initially, Schwarzman struggled to sell investors on his vision for the firm he founded with former US Commerce Secretary Pete Peterson. Buyout firms were seen as pirates that snapped up companies and larded them with debt before draining their cash and flipping them for profit. Most pensions eschewed private equity in favor of stocks and bonds.

Blackstone broadcast itself to the investing world by parlaying high-octane deals into big returns. Ushering in the gilded age for buyouts in the 2000s, the firm struck a record $36 billion deal for the late Sam Zell’s empire and took Hilton Worldwide private for $26 billion. In 2007, Blackstone went public in a deal that made Schwarzman one of the world’s richest people.

Its rise in the wake of the 2008 financial crisis epitomized a power shift on Wall Street. 

That same year, Blackstone snapped up debt-investing firm GSO Capital Partners, setting itself up to become a major source of financing as stiffer regulations prompted banks to retrench.

While risky real estate bets hammered the biggest banks, several of Blackstone’s pre-crisis property deals paid off. And when interest rates fell to record lows, the firm jumped on the cheap debt and shopped for deals. Meanwhile, yield-starved pensions and endowments turned to private markets for higher returns — giving Blackstone even more firepower.

The firm took in roughly $1 trillion of net flows from investors between 2012 and last year.

As Blackstone became a mainstay in institutional portfolios, it bet that individuals would drive more of its next leg of growth. In 2011, it began pushing in earnest to give wealthy individuals the ability to invest in private markets, drawing imitators across the industry. The crown jewel of that effort, Blackstone Real Estate Income Trust, morphed into a $68 billion juggernaut in about six years, cementing real estate as the firm’s fastest-growing business. 

In 2022, a slew of investors demanded their cash back as interest rates began to rise and real estate came under pressure — forcing BREIT to limit withdrawals. It was a cautionary tale on the dangers of investing on behalf of individuals, who can be flightier than institutions.

European Central Bank advisers cited the redemption requests and withdrawal limits as “stress events” that showed how commercial real estate could roil funds. US regulators wanted to know how BREIT’s restrictions affected markets. The episode prompted some bank platforms to be more cautious about offering illiquid products to individuals, demonstrating that Blackstone’s actions ripple through markets.

The fund served as a high-profile reminder that private investments involve trading off some liquidity for potentially higher returns. Blackstone still expects individuals to be a key market to corner.

‘Diverse Pools’
 

Insurers will also fuel the expansion. They provide about $175 billion to power a big chunk of Blackstone’s lending. The firm has shed some of its earlier DNA as a sharp-elbowed distressed debt player and now finances some 3,100 businesses and many of the industry’s buyout deals.

It’s preparing to further encroach on Wall Street’s turf, after a regional crisis felled three US banks and forced others to trim their balance sheets. Blackstone is exploring partnering with banks to take stakes in their loans. As alternative-asset managers like Blackstone gain ground on banks, the $1 trillion mark symbolizes the depth of US capital markets, according to former Securities and Exchange Commission Chair Jay Clayton. 

“Thank God that in America we have diverse pools of capital,” said Clayton, now a senior policy adviser to Sullivan & Cromwell. “The combination of banking products and our deep private capital markets makes our economy more nimble, which fuels growth and allows us to better navigate difficult times.”

Blackstone probably won’t be the only member of the $1 trillion private equity club forever. Brookfield Asset Management Ltd. aims to hit at least $1.5 trillion in the next five years, and Apollo Global Management Inc. has planned to reach $1 trillion by 2026.

That growth has pushed regulators to tighten the reins. Under SEC Chair Gary Gensler, the agency has ramped up scrutiny of fees and mandated more disclosure from firms that have long been less regulated than mutual funds.

As Blackstone gets even bigger, regulators and economists will be watching the performance of its funds to assess the hidden dangers nonbank financial firms pose to the economy. Asset managers generally argue that they don’t take deposits like banks and structure funds separately so stress in one won’t spur selling across their funds.

Blackstone’s housing plays have already drawn scrutiny. “As corporate landlords like Blackstone buy up rental properties, what will be the impact on families who are in those homes?” US Senator Elizabeth Warren asked in a 2022 hearing. 

For years, the firm has lobbied Capitol Hill to make the case that its investments in single-family homes don’t raise the cost of living, said a person familiar with the matter.

As president, Gray has centralized investment processes and asked dealmakers to assess the sectors they operate in to avoid the wrath of regulators and preserve the firm’s reputation. Some inside Blackstone question whether it can preserve its entrepreneurial spirit as it grows so large.

People familiar with Blackstone say there there is more process around how it handles information and makes decisions, but that those inside the firm are encouraged to fight for their ideas.

“It is symptomatic of private equity growing up,” said Josh Lerner, an economist who has studied the industry for Harvard Business School. “Private equity firms are no longer private equity firms. They are complex assemblages. It means more scrutiny from investors and regulators.”