Financial Market

Blackstone plans deal spree to pre-empt market revival

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Blackstone plans to step up its dealmaking before a rebound in markets drives prices higher, the president of the private equity firm has told the Financial Times.

“The wheels of merger and acquisition activity are picking up . . . We’d like to [invest] more before it is a consensus view because, by the time you get there, then valuations have moved,” said Jonathan Gray.

Since 2022, a sharp rise in interest rates has caused takeover activity and the listings of new public companies to slow markedly. Expectations that the US Federal Reserve will soon start cutting interest rates from two-decade highs have raised hopes among dealmakers for an M&A recovery.

Gray said that lingering uncertainty over the health of the economy and the timing of rate cuts had created a window of opportunity for the investment group, which manages more than $1tn in assets.

“It’s during this period of time where there’s still uncertainty and you’re bouncing along the bottom where we want to be aggressive,” said Gray.

His comments came as Blackstone posted mixed fourth-quarter earnings that reflect the fragile state of financial markets, particularly in leveraged private investments where the New York-based group is a giant.

The dearth of deals over the past year has made it challenging for large private equity groups such as Blackstone to sell successful investments and reap lucrative performance fees.

Blackstone last year recorded a 24 per cent decline in its distributable earnings — a metric that is favoured by analysts as a proxy for overall cash flows — to $5.1bn. That decline was caused by a 54 per cent drop in the performance fees Blackstone earned from asset sales, which fell from more than $4bn in 2022 to $2bn last year.

But in the fourth quarter of 2023, Blackstone reported a 47 per cent increase in such performance-based revenues, helping it to exceed analysts’ expectations with $1.4bn in quarterly distributable profits. Blackstone made $31bn in new investments during the fourth quarter of 2023, the highest quarterly investment total in more than a year.

The group has revved up its activity with a flurry of large deals, including the acquisitions of a utility company in Indiana, the dog walking app Rover and a large portfolio of bank loans from US financial regulators.

While Gray said the transactions reflected an “inflection point” in the pace of Blackstone’s investment, some parts of its business continue to face fresh challenges.

Blackstone marked down its property funds by more than 3 per cent during the fourth quarter, causing the group to miss out on some valuable fees it usually collects from the funds. Blackstone fell slightly short of lowered analyst expectations for its fourth-quarter fee-related earnings as a result.

On a conference call with analysts, Gray said that redemptions were slowing from Blackstone’s closely followed property fund, known as Breit, after an earlier surge prompted the fund to cap withdrawals beginning in December 2022. The trend suggested redemptions will fall below the level at which it limits withdrawals by the end of the first quarter.

The financial results and optimism about the investment landscape from Gray and chief executive Stephen Schwarzman on the conference call helped to push Blackstone shares higher by about 2 per cent in afternoon trading.

In his comments to the FT, Gray predicted real estate values would begin to rise again soon as interest rates fell. “We really see real estate bottoming from a valuation standpoint,” he said. “The declining cost of capital with rates coming down and spreads coming down for real estate borrowing is very helpful.”

But he said he did not expect property markets to snap back after years of turmoil, particularly among older office buildings hit by remote working.

“We would acknowledge that this is not going to be some sort of a V-shaped recovery. There are going to be plenty of troubled deals in the market,” added Gray.

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