Blackstone’s James: new initiatives will propel us to $1trn

At the firm's investor day, James outlined platforms for life sciences, defined contribution plans and insurance assets will set the firm on a path to double its AUM.

Blackstone won’t be coming out with a fund to rival the $100 billion SoftBank Vision Fund, but it will put an emphasis on technology in its quest to hit the 13-figure mark for assets under management, as reported by sister publication Private Equity International.

Speaking at the Blackstone Investor Day at the Plaza Hotel in New York on Friday, executive vice-chairman Tony James said the firm “[hasn’t] really thought” about its own version of the ultra-mega-fund as Blackstone looks to grow its assets, which it predicts could hit $1 trillion in the next eight years. Its current AUM is $439 billion.

“I think our ability to replicate that would be very hard to do,” he said, before adding that investors and analysts can expect to see the firm “leaning into technology” going forward.

In his presentation, James outlined initiatives Blackstone is already pushing ahead with, including its goal to build the largest infrastructure business in the world, starting with its open-ended infrastructure fund, which is targeting $40 billion.

The mega-trend is in the firm’s favour, James said, as huge advances in the fields of biology, genetics and chemistry are making “unprecedented leaps in our ability to cure disease”.The firm is also building out a life sciences platform, which “reflects a broader move of the firm that you’ll see over the next five years, I believe, towards earlier stage and more technology-driven investing”.

“Add in big data and AI and it’s gasoline on the flames; there’s a tidal wave of new opportunities coming,” he added.

James spoke of a “mushrooming funding gap” in the life sciences space as large pharmaceutical companies increasingly focus on short-term profits, squeezing budgets for research and development.

To fill such an opportunity, an “unusual combination” of scientific and operating skills are needed, as well as longer-duration investment vehicles.

“You need to be able to feed these ideas, feed these companies for quite a long time, so you need a different kind of fund structure, one that’s flexible enough to do early and late-stage and long enough in duration to stick with a company all the way from discovery to commercialisation,” James said.

“This business model required to do this well does not exist today anywhere, and we can do it.”

He said the strategy would start with a “few billion” dollars of assets under management, which could scale up to tens of billions.

This platform will offer investors a “unique ability” to invest at scale in venture, “an area where they are all very underweighted”.

The new 800lb gorilla

James told attendees that managing insurance assets has “the clear potential to be our single largest business group” by AUM, thanks to an industry under severe pressure from increasing regulatory capital requirements and “zero interest rates”.

“They have no choice but to move into alternative assets and into private credit where they can get more yield for the same risk. They are also being forced to sell books of business and redeploy the balance sheets into areas where they can grow.”

Blackstone is not only “ideally positioned” to help with the alternatives portion but has become the largest originator of credit assets in the world, for which it doesn’t currently have a pocket, James said.

As well as managing the alternatives portfolios for these insurance companies, Blackstone has the opportunity to raise third-party money in permanent capital vehicles to buy the books of businesses.

“It’s more complex,” he said, “because we have to manage the liabilities as well as the assets, but then if we do we get the whole balance sheet in perpetuity and we can make money both managing that balance sheet and the assets on that balance sheet as well as managing the equity owning these books of business. This is fundamentally a larger and more profitable business than simply having accounts to manage for insurance companies.”

Solving an embarrassment

Access to alternatives needs to be democratised
Tony James

Another “huge opportunity” James discussed – and a personal interest of his – is that presented by defined contribution plans. He said he believed the current system, under which DC plans are “effectively barred” from investing in alternatives in the US “cannot last”.

“Retirement savings in America are woefully inadequate – not just a little short, it’s an embarrassment,” he said. “One in three baby boomers retiring in the next 10 years will be in poverty or near poverty. This is obviously an untenable situation.”

James said one of the “least painful” and easiest places to start solving this issue is “simply to invest the money better”; while 401(k) plans have historically earned around 3 percent, pensions have earned more than 7 percent, with the latter benefitting from heavy investment into alternatives.

“Access to alternatives needs to be democratised. Individuals should have the same access as institutions, even if these products are invested in other funds like target-date funds, but they need access to them one way or another,” he said. “The massive scale of retail money means that a small shift of assets into alternatives is a huge opportunity for our industry.”