Blackstone Group, the world’s largest alternative asset manager, is warning of a continuing slowdown in economic activity as persistently high inflation forces the Federal Reserve to continue raising interest rates.
“The economy today on the ground is still pretty healthy, but we’re definitely seeing some signs of a slowdown,” Blackstone’s president Jonathan Gray told the Financial Times. “Because we see inflation as stickier, in labour and housing markets, in particular, I think it will mean the Fed will try to do more and slow the economy further.”
An increasingly aggressive central bank also has Blackstone expecting a prolonged lull in dealmaking activity from the record levels set last year, with Gray warning they had “seen a material reduction in deal activity”.
In second-quarter results published on Thursday, Blackstone disclosed continued growth in assets under management as investors pile into private investment strategies, but it marked down the value of some of its flagship private equity, credit and real estate funds.
A total of $88bn in new investor money flowed into the New York-based investment group, putting its assets under management at a record $941bn, a 38 per cent increase from this time a year ago.
The rising assets meant Blackstone’s fee-based earnings and cash flows also remained near record levels despite a sharp sell-off in public equity markets to start the year.
Distributable earnings — a metric that is favoured by analysts as a proxy for overall cash flows — rose 86 per cent to $2bn from the same time last year, which equates to $1.49 a share. Those results narrowly surpassed analyst forecasts.
The inflows were the second highest for any quarter in Blackstone’s 36-year history, said chief executive Stephen Schwarzman in a statement.
In the quarter, Blackstone marked down its $276bn portfolio of corporate private equity investments by 6.7 per cent, while some funds tied to real estate and credit investments were also marked down.
Blackstone’s once standout growth investment fund experienced the most severe drop in performance. The fund, launched in 2019 by Jon Korngold, a dealmaker poached from competitor General Atlantic, had virtually all of its investment gains wiped out. At the quarter end, the fund’s net internal rate of return was just 2 per cent, vs 17 per cent three months earlier.
The firm’s hedge fund investment portfolio and its holding of a large liquefied natural gas export terminal stood out for gaining in value.
Blackstone reported a $29mn net loss on a GAAP basis, which accounted for unrealised investment losses attributable to its stockholders stemming from the markdowns.
Though volatile markets tested Blackstone’s investment skill, all of its major strategies, including its growth strategy, attracted new investor money. Blackstone raised $24.4bn and $8.8bn for new flagship funds in real estate and corporate private equity, respectively.
It also drew more than $15bn in new money from wealthy investors who piled into the firm’s perpetual funds — funds without a maturity or end date. Volatile markets may curb inflows from these investors, which have been the biggest driver of news assets to the firm in recent quarters, Gray warned.
“When you have this kind of volatility, it’s not a surprise if you see a moderation in flows.”
Gray also left open the prospect that Blackstone would cut back on its aggressive hiring plans to match a more uncertain environment.
Blackstone’s headcount is forecast to increase more than 20 per cent this year, but Gray said the firm may rein in its growth plans.
When asked if the group could slow hiring, he said: “Potentially yes. But we’re still growing.”
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