Blackstone’s Schwarzman: secondaries to benefit from PE being ‘too successful’

Amid high inflation and rising interest rates, Blackstone’s chief executive Stephen Schwarzman believes the secondaries market provides an interesting opportunity.

For over a decade, markets were “almost going straight up and, as a result, the default decision for almost everyone is, ‘Let’s just put money in equities'”, Schwarzman said at the recent IPEM conference in Paris. In the new market environment, secondaries – as well as credit and energy transition investing – are areas where attractive returns could be made.

Blackstone’s Strategic Partners unit raised a record-breaking $25 billion at the start of this year, comprising $22.2 billion for its flagship private equity secondaries fund and an additional $2.7 billion for its inaugural vehicle dedicated to GP-led deals. The hefty raise came as a result of institutions now being unbalanced in terms of their overall asset allocation, Schwarzman said.

“Private equity has just been too successful,” he added. “Institutions made so much money that all of a sudden they’ve exceeded their expected exposure.”

LP-led deals took the larger share of the $42 billion of secondaries activity in the first half, according to Evercore’s H1 2023 Secondary Market Survey. LP-led transactions accounted for 61 percent of volume, reaching $25 billion. This represented the second best first half on record for such transactions, down slightly on the $26 billion – 49 percent of activity – recorded in H1 last year, the report said.

LP-led processes moved into the second half “with greater velocity and momentum than last year, as the relative rebound in pricing in Q2 drives volume up”, according to the report. “More large LP sales are coming to market, or currently closing, than were witnessed at the same time last year, presenting a larger volume overhang”.

Because of the harsh exit environment, cash-strapped investors will continue to look to the secondaries market to sell some of their exposure, Schwarzman said.

Verdun Perry, global head of Blackstone Strategic Partners, said in the latest episode of Secondaries Investor’s Spotlight podcast series that Blackstone is looking for diversified portfolios that are 75-90 percent funded and 6-10 years old, where it also has a competitive advantage – for example, a pre-existing relationship with a seller or intermediary, or the time required to understand a portfolio.

“We’re currently invested in over 5,500 unique private equity funds across over 1,600 different GPs… That information is very powerful. That amount of data, in our opinion, is unparalleled,” Perry said.

“We want to assess and evaluate the assets from the bottom up. We don’t want to assume blind-pool risk… We’re investors, so we want to assess assets that are in the ground that we can touch and feel and understand.”