Blackstone shifts focus from US to Europe

After more than three years of not investing private equity dollars in Europe, The Blackstone Group has been pursuing more opportunities in the region this year than it has in the US, president Tony James said at an industry conference Wednesday.

The firm has made four investments in Europe in 2011 and scaled back its US activity partially as a result of hot US credit markets earlier this year and pricing that was “way too high”, according to James.

“Generally I would say that hot credit markets are the enemy of good returns in private equity,” he said. “Almost always when there are hot credit markets, there will be a lot of deals that will be too pricey and the returns will be mediocre.”

James was speaking at the Dow Jones Private Equity Analyst Conference in New York.

Blackstone’s increasingly active presence in Europe “surprised people given what’s going on”, James said, adding that the sovereign debt crisis has not eliminated opportunities to buy quality businesses at attractive prices.

“The companies we’re buying we think will get good returns assuming things will be pretty bad for quite a while,” he said. “They’re either that cheap or they’re insulated from [the crisis].”

Blackstone’s LPs, which previously were asking the firm not to draw down capital “unless you absolutely have to”, James said, have changed their tune in 2011.

“It swung instantly, and this year there’s been a lot of pressure actually to just put money out from LPs,” he said.

Roughly two thirds of Blackstone LPs polled at a recent meeting said they are in the process of increasing their allocation to private equity, he added, with about 25 percent remaining at their current level of exposure and 8 percent decreasing their holdings in the asset class.

Co-investments, meanwhile, are increasingly popular with LPs, James said, in part due to the lack of fees that come with club deals.

“An awful lot of the big LPs want at least a dollar of co-investment for every dollar in a fund.”