Blackstone is expected to this year hit $1 trillion of assets, a key milestone in the firm’s and private equity’s history, thanks mostly to non-stop product creation.
“You always have to be developing new products where the margins are greater and you can take the leading market share,” Stephen Schwarzman, Blackstone’s CEO, said at the Bernstein 38th Annual Strategic Decisions Conference. “And if you really execute well on that, it’s very difficult for others to be as successful.”
Schwarzman was responding to a question about the “secret” behind the firm’s growth and performance, relative to the industry as a whole.
He said getting into fresh strategies and adjacencies, and expanding the investable universe, has been part of Blackstone’s culture since its founding in 1985. “We basically started our business as an innovation machine. Not to be clever, but just to survive and thrive.”
Like other PE pioneers, Blackstone was originally a classic buyout shop. Over time, it seized on other opportunities as the market presented them, Schwarzman said, often resulting in the launch of platforms. He cited the example of real estate, begun with a single deal in the early 1990s that ended up generating a 64 percent return.
From this experience, “you decide this is perhaps an interesting field to be in,” he said. Three decades later, real estate is Blackstone’s largest business, with $298 billion of assets.
Another example is tactical opportunities, built from scratch in the wake of the financial crisis. Named by Schwarzman, it aimed to invest opportunistically in assets, geographies and sectors not covered by other Blackstone funds. It is now a $37 billion platform.
This approach was taken “from asset class to asset class,” Schwarzman said. When scoping out a niche, he added, a major success factor is talent. “You must do it with somebody who is a ten on a scale of ten.”
Nearly 60 strategies
Today, Blackstone’s “innovation machine” continues to hum. “Once a year, each of our verticals in the firm have to come to a meeting with the management committee and they all have to have three new business ideas,” Schwarzman said. “And then we only allow them to do one.” This, he noted, “is a system for us.”
Product creation has accelerated of late. In a year-end 2021 earnings call, Schwarzman said Blackstone offers almost 60 strategies, up from 35 five years ago. Many are subsets of the broad categories for which the firm is known, such as PE (for example, growth equity, secondaries), hedge fund solutions (GP stakes, seeding) and credit (distressed, insurance).
The fast pace should continue in the months ahead, as Blackstone targets $150 billion for its next round of fundraising. This activity excludes several other domains earmarked for development, such as insurance and retail, which are top priorities.
LPs, hungry for more choice and customisation, are open to GP expansions into new areas when a firm commits to a strategy by allocating fresh resources to it. Schwarzman recognised this in the earnings call, saying “our customers are constantly in our store and our shelves are full,” providing Blackstone with “a huge percentage of repeat business.”
In a fundraising market characterised by high velocity and proliferating vehicles, LPs are perhaps also concerned about how to manage the size and scope of their exposure. Some view large multi-strategy shops as asset-gatherers, more interested in earning fees than alpha returns.
For Blackstone, however, entering unexplored territory and spinning out platforms is a tried-and-true growth mechanism. “We should be everywhere first,” Schwarzman said at the Bernstein conference. “And we’re finding enormous take-up of these kinds of products. So, if you think we’re done, that’s a wrong thought.”