Blackstone's Baratta on Global PE Markets, Possible Recession

so thanks for joining us great to be your atop the private equity business at Blackstone you know it'll but you know you and you have spent about roughly twenty years twenty in July yeah and you worked in London and that was really I wanted to start there in part because it's kind of where you sort of made your bones in a lot of ways too there's a couple seminal deals for the firm legoland notably and Merlin and all of those as you look back to Europe at this point what do you see let's start there well when I move there it was November 2001 so you didn't even have the single currency yet and the private equity market was nascent really I mean they called it venture capital firms like primeira were called Schroder ventures sin van was this small little venture oriented firm and and we were investing out of a three and a half three point seven billion dollar fund at that time and who was really the early days the private equity not even not just in the United States but in Europe it was it was the very beginning so we got lucky really and we were I basically looked at what had succeeded in the u.s. up to that point and it was largely in highly fragmented industries that were undergoing consolidation creating market leaders out of small mom-and-pop businesses and so we pursued that strategy largely in the UK and Germany which were the two most receptive markets I'd say to to private capital and the most predictable and where the capital markets were the most well established and we consolidated pubs and nursing homes and hospitals and and theme parks and visitor attractions and so that it was really just trying to figure out what had worked in the u.s. applying it in those two economies mainly and we had really the wind in our sails in terms of the development of the private equity market the development of the capital markets particularly the debt capital markets in Europe and enormous economic growth that we all understand in retrospect driven by the enormous subsidies that were that were being transferred from northern Europe to southern Europe and the overall economic growth that that that that Europe had enjoyed in that in that first decade of the 2000s so now you're back here how are your partners feeling about Europe right now what are they saying back to you here you know Europe has great businesses and we are micro fundamentally micro investors we spend time thinking about where we are in cycles and geopolitical events and you know GDP growth but at the end of the day we got to buy a good business and we got that we can do something too and pay a reasonable price for it and make sure that the business has some sustainable competitive advantage and there are many businesses that fit that bill in Europe in Germany in particular in the UK and northern Europe also good good businesses although fewer I'd say in southern Europe and so it is definitely a stock pickers market there's no more of this big wind in your sails economically valuation wise the expansion of capital markets all that's probably going slightly in Reverse as the banking system is still under enormous pressure with the ECB throwing a lifeline is literally the lender of last resort to the to the big financial institutions in Europe and I don't see that changing anytime soon so so the bar is higher now to invest in Europe you have to find really good businesses pay a fair price it's harder to get deals large scale deals done in Europe than it is in the US it's very hard to do public to private because of the takeover code you need 90 percent of the shareholders to tender or 95 I think in France in the UK you need 75 so it's a it's really a middle market compared to the u.s. in in private equity parlance in terms of size of transactions and how our valuations globally how are you feeling about them how expensive is the world right now it's it's extremely expensive historically expensive and you know where we're subject to that and we have to navigate within that fortunately we're only making 12 investments a year roughly globally out of our global buyout fund across five key Geograph regions us Europe India China Australia and now Japan so and we have a hundred and forty people out in the world trying to source transactions so I think we're able to find those ten or twelve interesting idiosyncratic situations but there is not a single industry or a single country where we say it's time to buy the wind is in our sails the valuation environment is going to only improve I think I think we have headwinds on on most of the key industries we look at with the exception of energy about 18 months ago but that's that's come roaring back and and in most of the geographic regions we invest in and when you think about possibility of a recession globally and in the u.s. how worried are you that that is looming and what's the timeline you see well looking at our 90 portfolio companies and the data we get monthly from from them I would say that the economy is globally is in rude health and I don't see any signs of that abating anytime soon meaning in the next quarter or a year the expectations of our CEOs is for continued strong growth the industrial rebound in the United States since 2015 and that really the industrial economy in the US didn't really rebound much until 2015 and we now have businesses that are throwing their top line at 8 to 10 percent that are traditional GDP growth businesses so we're above GDP trend in u.s. industrials I think European also particularly German industrials consumer businesses are more on trend you know kind of 3 4 percent real growth maybe 5 6 % nominal growth and I I don't see that changing anytime soon I think the risk to this vintage is less when a recession comes because it will but I don't think it'll be anywhere near the same severity or magnitude as the the the 9/10 recession I do think though global cost of capital is poised to increase rather significantly which will affect credit spreads and obviously the 30-year Treasury rate which has already moved up PE multiples that I think will be the risk to this vintage where people bought assets assuming they could sell at the historically high multiples that they paid and that won't necessarily come to fruition how much are you worried about the amount you mentioned your global private equity fund how much are you worried about the cumulative or collective dry powder chasing deals at this point I'm worried less about that honestly because the the benchmark valuation is always the public market comp it's not really whether you have eight or ten people in an auction and whether or not the the eight people in the auction have a fund that they've just raised that doesn't that doesn't enter into our thinking one thing though that that does make the environment more difficult and it does relate to the availability of capital as I heard Johnathan say and I agree with the simplicity of the supply and demand is that you have buyers in our market that weren't there a decade ago that think this is easy so whether it's our are our own customers in some circumstances our partners yes family offices people who used to work at a firm like Apollo or wherever raising money really credible people who probably will get capitalized but maybe only know a bull market and so we're seeing incremental competitors incremental firms coming into our market or there was a while there where Chinese firms were acquiring assets and competing with some of your assets these matter in fact and we were all beneficiaries of that to some extent but also they were competing for assets so that that I view is the bigger issue than whether or not the guys you had up here earlier Bain and Kay Karen and Carla who are super rational super disciplined investors whether or not they have more capital to master or not one of the issues that has been a theme throughout the day has been how public investors view private equity firms we have a chart here behind you that was there right behind you and disappeared it exactly the right time the public markets thank you I just want to make sure it was paid Steve Schwarzman has lamented on this stage the fact that the public investor writ large has not totally understood private equity what are they getting wrong well I mean I'll start by saying my mission and mandate is to invest her private equity funds well so I if I if me and my partner's in the team of 200 odd people who work in this great business do our job well then that price will go higher and so it's hard for me to understand exactly how the market views our stock I'm not sure I mean I care at some level because it's my biggest asset personally but I think about it over the next decade and if we do our job well I think that the fact that these firms trade at pretty low multiples of their cash flow should should should change I mean I think we're still in like a ShowMe moment as as firms all these firms is publicly traded stocks and so I think it'll I think it'll work out if we do our jobs well so speaking of public shareholders and shareholders in general one of the probably the single Holy Grail it feels like for a lot of private equity firms are alternative asset firms is access to retail esther's of some sort whether that's into 401ks or IRAs or some other method how far along are we in that and what's the next step forward from a Blackstone perspective I think retail is exposure to illiquid alternatives is virtually non-existent certainly not in the 401k area right defined contribution which is a big thought piece that my partner Tony James and and former president of Blackstone has been driving and I think it's inevitable that it will change because having an allocation to private equity and private credit and other things I think would would better balance people's individual portfolios there's no reasons they have there's no reason they shouldn't have exposure it's harder to access retail money for my type of business which is quite illiquid you you commit capital we invested over five year and we return it over the following seven or eight and so you you invest a dollar and you know you'll see you know two or three dollars if we're really good that over time but it's it's a long time from now and you can't get it back until we send it back to you so it's not the perfect product what what I do is not the perfect product for retail although I think there's a percentage of everybody's portfolio that should have exposure to that because right you're theoretically like I'm not yeah if I'm everything's okay I'm not going into my 401k anytime soon correct you're not you're not pulling money out of that and there are benefits to private ownership of assets we can attract great talent make better capital allocation decisions than public companies can control the exit which is important when the markets are are down and people are withdrawing money from mutual funds in etf's you have permanent capital impairment we never do unless we make a bad investment decision we're never gonna sell a viable company at below our cost ever why would we do that so there's lots of good reasons for everybody to have a private equity allocation I think it's hard because of the illiquidity but I think that'll change over time and then there are other things we invest in like real estate corporate credit liquid alternative strategies that are gaining enormous retail momentum as we speak and attracting lots of capital our firm's very well-placed to manage that money because of the confidence we have in real estate and credit investing I think private equity will will be a longer road until we start seeing meaningful flows of retail money into into what I do and when you think about shifting to the the private side and your big institutional partners your limited partners be those sovereigns or pensions or family offices whether you mentioned them as competitors to some extent how does that play out over the next few years does that get more competitive how does that relationship of all I don't think so I would say we are in we are in business to serve our large institutional capital providers which are the state pension plans in the US sovereign wealth funds in large part that forms the core of our investor base and the most sophisticated of those who like to make direct investments realize that we are a great partner and can help fulfill their mission of deploying capital on a direct basis so you take the last couple of really large deals we've done have exceeded the capacity of our fund in a single exposure we don't really want to put more than 10% of the fund in a single deal so if we have a four billion dollar equity check and the most I want to put in the fund is a billion and eight billion eight to two billion we need a partner and we call on these these large sovereign wealth funds and state pension plans to provide that capital and so we're able to manufacture opportunities that they can't on their own and they realize that right so when they do compete it's more in plain vanilla sort of situations and and I think they view us as partners and we view them as our lifeblood you know they are our partners in this business without them we don't exist and so I think we have a great symbiotic relationship even with the with the the firms that you would deem as sort of competitors in certain circumstances so as you look over the last ten years say and certainly since by someone publican in 2007 based on assets under management alone Blackstone has really distanced itself from its its closest rivals in part by diversifying a to questions come from that one is how how did that what was the if there were a couple catalyst what were they and the second is how does private equity as part of that remain relevant an important given that part of what drove that was diversification well when I started at Blackstone 20 years ago we had a private equity business a real estate business the corporate credit business and a hedge fund business which is exactly what we have today so diversification was not something that we alighted on when we went public in 2007 or after that each of those businesses is now much bigger and as private equity when you join me 20 years ago private equity was much bigger than a private equity was as I said we were we were investing out of a couple of billion dollar fund we had a billion dollar real estate fund we had a I think it was a nine hundred million dollar mezzanine fund and we had three or four hundred million dollars in what we call Pam which is our liquid alternatives business they're all now obviously way bigger private equity was the largest and most profitable had the most people in that moment today we have roughly the same amount of assets in each of the four businesses real estates a little bit bigger and that's just was the DNA of the firm Steve believed that he wanted to build an enduring institution and he wanted to build an institution that was diversified and that could take advantage of of opportunities when they came up across asset classes and so our real estate business was born out of the savings and loan crisis in the early 1990s and the Resolution Trust Corporation where we bought a bunch of assets which is when John Gray started who now is the president of the firm and built the real estate business from what it was too clearly the market leader we can talk about how that happened but it really accelerated in the in the post-crisis period and credit was always a very important part of of what we did and it was accelerated again with the with the partnership of an acquisition of GSO so private equity however remains I think the core to the the franchise and the the highest profile in terms of the types of companies were vying and where we have potentially the most the most risk of things going wrong so the amount of attention paid by you know the senior people at the firm on this business is enormous and if we do it right it should be the most profitable of our businesses because where we should be able to compound over long periods of time at 20% plus type you know gross returns so the multiple of money and and the carried interest that comes from this business will always be you know the bedrock along with our real estate opportunity funds the bedrock to Blackstone's profitability so where we are as important as we ever work mean we the small we the private equity businesses we as we ever have been to the overall firm and just got a couple minutes left how are you feeling about returns at this point given where valuations are given the state of the market given competition how much danger is there that returns sort of start to wane a little bit well there's a lot of there's a lot of danger I don't think any of us are willingly underwriting in a base case returns to low levels or even lower levels than we had been historically but the degree of difficulty to achieve those returns is higher now and so the risk that you don't achieve it is also higher and therefore the expected return out of the median private equity deals probably lower than it was a decade ago you know obviously I believe and if I didn't I shouldn't have this job that we can continue to generate the same types of returns we've built our organization in a really profound way to be better stewards of businesses better industrialists we have our portfolio operating intervention effort which has 50 60 people engaged in it is robust and every time we buy a company we have a really specific set of actions that we're gonna take to improve under our control to improve the business to help realize these returns if we don't do it we're not going to generate this the same types of returns as we had historically but I believe we can and the investment we've made in that has been is really critical to the continued generation of good returns I'm gonna follow the very good example that Scarlett Foose set just before us and end on time okay Jo Bharata thank you very much for joining us access a she ate it thank you [Applause]

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Length: 19min 16sec (1156 seconds)

Published: Tue Jun 05 2018