Blackstone president sees opportunity in turmoil

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If you’re a CEO feeling stressed about debt, the president of US$1-trillion asset manager Blackstone Inc. BX-N wants to hear from you.

Jonathan Gray is in Canada this week to open an office in Toronto and pitch Blackstone funds – private debt, real estate and private equity – to institutional clients such as insurers and pension plans. His message is the “megatrend to alternative assets” is stronger than ever, with the headwinds facing the global economy creating more opportunities for fund managers willing to commit their capital.

Mr. Gray, 53-year-old heir apparent to Blackstone co-founder and chief executive officer Stephen Schwarzman, is also scouting for opportunities to put the New York-based asset manager’s cash to work at Canadian companies squeezed by rising interest rates and banks that are increasingly reluctant to lend.

“In credit markets, we’re seeing more opportunities to help quality companies that are stressed by balance sheet issues,” Mr. Gray said in an interview. “We’re less interested in distressed situations.”

Mr. Gray also sees an opportunity to help institutional investors that are overallocated to some asset classes or pinched for liquidity by buying parts of their commitments to funds in the secondaries market – stakes that Blackstone can pick up at “a pretty meaningful discount” of 10 per cent to 15 per cent in many cases. At a time when high interest rates and slowing economies are making it much tougher to do deals and recycle capital, being a liquidity provider to these large investors “makes a lot of sense,” he said.

Blackstone is one of the world’s largest players in the rapidly growing private debt sector, with US$295-billion of client capital committed to credit. Mr. Gray said recent stress in credit markets, caused in part by pressures facing U.S. regional banks, is creating opportunity for lenders willing to make long-term commitments to companies.

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“In credit markets, lenders can trade liquidity for superior returns,” Mr. Gray said. Over the past 12 months, private credit is Blackstone’s best performing asset class, returning 12.7 per cent.

While the amount of capital earmarked for North American private debt funds has increased fourfold since 2010, according to data serve Preqin, Mr. Gray said the sector remains far less competitive than public equity markets, with a relatively small number of fund managers lending in a US$12-trillion debt market.

Last week, the U.S. Federal Reserve indicated interest rates would likely stay higher for longer than it had previously anticipated in order to bring down inflation. Mr. Gray said Blackstone’s fund managers concur with this view and are prepared for an economic slowdown. “You don’t fight the Fed,” he said.

Blackstone is steering clear of distressed debt – buying loans that are in default or lending to companies that have missed interest payments – because at this point in the credit cycle, the bulk of candidates are “buggy-whip business,” left behind by advances in technology or shifting consumer habits, Mr. Gray said. He also said banks tend to lock up the best assets at distressed companies, leaving private lenders with little collateral.

Blackstone also recently opened offices in Paris and Frankfurt, Germany. Mr. Gray said as the 38-year-old fund manager expands, “we are trying to be more local” by having investment professionals in major markets. In Canada, Blackstone owns a portfolio that includes warehouses and data centres.

As part of the fund manager’s energy transition investments, Blackstone is building a 546-kilometre electrical transmission line to link Hydro-Québec to New York, a US$6-billion project. Globally, Mr. Gray said the fund manager plans to invest US$100-billion over the next decade in businesses that will play a role in transition from fossil fuels to renewable power.

In Canada, Mr. Gray said Blackstone is targeting investments in student housing, a strategy that reflects the “housing challenges” that come with a population that is growing at five times the rate of the United States. Mr. Gray ran Blackstone’s real estate portfolio prior to becoming president in 2018.