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Jon Gray has insisted for some time that Blackstone, where he is president, will not wait for the “all-clear” in order to jump-start its investment. During last week’s earnings call, Blackstone said it had put $34bn to work in the most recent quarter. The group, along with KKR, Apollo and Ares put $160bn to work in the period.
That comes just as red lights start flashing. The S&P 500 is down a tenth since its July peak, hobbled by worries of a recession and capital markets volatility spreading across the world. Blackstone shares have lost roughly the same in that period.
Private markets are supposed to be less erratic than their public equivalents, since those instruments are not traded on exchanges where valuations are marked constantly. It has been a running joke each quarter that when the listed private capital managers shared their returns, the rosy figures seemed unmoored from widely broadcast public market benchmarks.
The signals now are mixed. Inflation has abated and central banks are going to ease monetary policy soon. But the economy may already be facing a slowdown; interest rates will not go back to zero.
Apollo likes to say that “purchase price matters.” A series of groups that specialise in leveraged buyouts, who rose to prominence in the zero-interest rate policy era of free money, are probably in big trouble. They paid high prices that simply won’t prove justifiable.
As for Apollo itself, its current incarnation as insurance-based credit manager has been a huge success. Its market capitalisation hit $70bn in June. Unfortunately, in the last week it lost a fifth of that.
In its latest earnings, Apollo disclosed that its riskiest bucket of investments, where annuity premiums are allocated, sharply missed its targeted return. That hit overall profits. And fuelled investors’ questions about a business model that remains untested through a credit cycle.
Still, the best investment returns are almost always sourced in the midst of turmoil. Debt spreads widen and valuation multiples contract. Conviction pays off.
But this bout of volatility is problematic for an industry already struggling to find successful exits to recycle cash into new deals. The real skill of private market funds has always been the ability to spin mediocre or worse returns into healthy enough future fundraising to live another day.
Just a week ago, a quick unwinding seemed far fetched when the base case was a soft landing or smooth take-off. Give Jon Gray credit for admitting that his job is to put money at work as best he can and hope that it works out.
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