The US$1.2 trillion firm is a giant non-bank lender in its own right, with credit dominating flows in the third quarter
[NEW YORK] Blackstone sent the strongest signal yet that private equity dealmaking is coming back at the world’s largest alternative asset manager as borrowing costs fall.
The expectation for lower interest rates is also a double-edged sword for the firm, threatening the profits of Blackstone’s largest business by assets: credit and insurance.
Shares of Blackstone fell as much as 5.9 per cent.
Blackstone’s distributable earnings surged 48 per cent in the third quarter, fuelled by a burst of investment exits from its private equity arm, according to an earnings release on Thursday (Oct 23).
“The cost of financing and more availability of capital is allowing the system of capital to move much faster,” president Jon Gray said.
The US$1.2 trillion firm is a giant non-bank lender in its own right, with credit dominating flows in the third quarter.
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Blackstone’s significant presence in private credit exposes it to scrutiny and shifting investor sentiment in that market. Future rate cuts stand to reduce the firm’s ability to charge borrowers more on floating-rate loans.
“As base rates come down and as spreads tighten, some of the very high returns that were achieved being a senior lender in private credit, that’s harder to do,” Gray said.
The firm faced questions from Wall Street analysts on Thursday about whether declining yields would affect cash coming in from individual investors.
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“By definition, when rates come down, that impacts yield,” Gray said. But private-credit investors will ultimately understand that they can still get a “meaningful premium” to public markets, he added.
Shares of Blackstone are down 11.5 per cent this year, compared to the S&P 500’s 14.9 per cent
AI boom
Across the firm, profit available to shareholders jumped to US$1.89 billion, or US$1.52 a share, beating the US$1.22 average estimate of analysts surveyed by Bloomberg. Blackstone more than doubled its haul from selling investments in the third quarter compared with a year earlier. It also took three companies public.
Its private equity arm’s string of exits mitigated muted returns in real estate.
Blackstone’s highest-performing strategy during the third quarter was infrastructure, which delivered a 5.2 per cent return. The firm has bet big on data centres, energy and the grid – areas that could be the “picks and shovels” that drive artificial intelligence (AI).
Unlike the dot-com boom of the 2000s, “the companies who are leading this era right now, for the most part, are highly profitable, large-cap companies with pristine balance sheets”, Gray said.
At the same time, the arrival of transformative technology “invariably causes some enthusiasm”, he said, warning that “there may be some pockets of that starting”.
Gray joined other private-credit executives in pushing back on recent comments by JPMorgan Chase chief executive officer Jamie Dimon, who suggested that recent bank losses from subprime auto lender Tricolor Holdings portend wider problems.
Tying a few troubled financings led by banks to providers of private credit seems like a stretch, Gray said.
“We don’t really understand that connection,” he said. “They all feel pretty idiosyncratic.” BLOOMBERG
