BLACKSTONE’S profit climbed 4 per cent in the final quarter of 2023 as president Jon Gray sees an inflection point for private equity after one of the industry’s worst years.

The world’s largest alternative-asset manager reported distributable earnings of US$1.4 billion, or US$1.11 a share, beating analysts’ 96-cent average estimate. The surprise increase snapped a run of consecutive quarterly declines that began in late 2022.

Private equity firms felt the sting as the Federal Reserve’s interest-rate hikes drove up borrowing costs and slammed the brakes on deals after an era of easy money and cheap financing.

“There’s this movement from higher cost of capital in the last two years to what appears to be a lower cost of capital as inflation has come down,” Gray said in an interview. “There is a virtuous cycle that happens when you get this regime shift.”

Buyout firms are not only starting to signal a readiness to wheel and deal again, they are also under mounting pressure from investors to return cash.

Blackstone generated US$15.8 billion from sales of bets in the quarter, up 17 per cent from a year earlier.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The wild card for the industry and economy is how deep the Fed’s rate cuts will go, said Gray, 53. It is reasonable to believe the central bank will lower rates in the first half of this year, he said, but “it may not happen as quickly as the market is hoping”.

Rising inflows 

The firm took in US$40 billion in new money from investors, up from US$28 billion in the year-earlier period. The largest share of it went towards credit, which drew money from insurance clients. Private credit chalked up the biggest gains among the company’s strategies in the quarter. Blackstone’s deal to buy into Signature Bank’s commercial senior mortgage loan portfolio also pulled in US$10.5 billion.

The firm’s closely watched fee-related earnings slipped 2 per cent. That is in part because some key funds in the private equity business have yet to start the clock on earning fees. 

What is more, the firm’s real estate trust for wealthy investors notched a 0.5 per cent loss in 2023, the lowest annual return since its 2017 debut. The Blackstone Real Estate Income Trust (Breit) fell short of a threshold that would allow the asset manager to partake in profits.

That fund was a harbinger of a broader slowdown in commercial property after it enforced redemption limits in late 2022 while responding to investors’ mounting requests for cash. 

Redemption requests in December were down 80 per cent from a peak last January. If the trend continues, Gray predicts that Breit will no longer have to limit withdrawals in the current quarter.

The bright spots were not enough to resurrect rewards for dealmakers and executives for 2023. Blackstone’s pool of carried interest, the share of profits managers get when they generate cash returns from sales, dropped 51 per cent from the previous year.

“If we don’t deliver as much for investors, we earn less,” Gray said. “That’s the business model. That alignment is very important to investors.” BLOOMBERG