Private-market investments among individuals set to grow, says Blackstone

EQUITY and fixed-income markets are in turmoil but the headwinds are not expected to dent the growth of Blackstone’s Private Wealth Solutions (PWS), which helps high net worth individuals (HNWIs) to invest in private markets including private equity, real estate and debt.

Joan Solotar, the firm’s global PWS head, says adoption of alternative assets among HNWIs has grown dramatically over the past 3 to 5 years. “The biggest changes over the past few years have been in innovation around product and more awareness and education, particularly on the need for income and inflation protection.

“If you think about the environment in 2022, I believe when we look back later, we’ll say there was yet another catalyst: the traditional 60/40 stock-bond mix has performed terribly in 2022, whereas private investment portfolios have generally outperformed.’’

Solotar had earlier set a goal for PWS to attract US$250 billion in assets over 10 years, between 2017 and 2027. As at end-March 2022, the global retail business has nearly hit its asset target at US$222 billion, in half the projected time frame. This is around a quarter of Blackstone’s total assets under management (AUM) of US$931 billion. Global retail AUM has doubled since 2020.

 “Our growth has exceeded the original target and I still believe we’re very early in the adoption of alternatives… When I put out that US$250 billion target, it was difficult for people generally to grasp the scale. But now when I say we’ll go from US$222 billion to at least US$500 billion, there is greater acceptance that that is a reasonable goal, because there is proof of concept now, and much more evidence that individuals are in fact incorporating alternatives into their portfolios.’’

The 2021 EY Global Wealth Report projects that by 2024, 61 per cent of HNWIs in Asia Pacific are expected to invest in alternatives, up from 37 per cent currently.

Until recently access to private-market investments, such as private debt and equity, was limited to institutions and family offices, or the most wealthy of individuals. But innovations over the past few years have greatly widened access. These include fund structures that offer more liquidity even if still limited. New regulations in Europe and the UK are also expected to facilitate access for more sophisticated retail investors. More recently platforms have also tapped blockchain technology to tokenise private assets, offering them to individuals in bite-sized chunks.

Blackstone itself has built a “perpetual capital’’ segment of assets, which are open-ended funds with a degree of liquidity, in strategies such as real estate income and private credit. As at the first quarter, perpetual capital comprised about 36 per cent of total AUM, or US$338.2 billion. The segment has more than doubled on a year-on-year basis, from US$149 billion previously.

Investor appetite is also driven by the search for uncorrelated assets, which can be found in private markets.

Solotar reckons individuals have allocated less than 5 per cent of their portfolios into private markets. “I still think we’re quite a long way from where (private-market asset allocation) will settle… I also think the mix of assets has shifted. Previously it was more hedge fund oriented. Today you’re seeing more private real estate and private credit.’’

She adds: “We believe we can build something off the back of literally decades of good performance in a particular area, and then figuring out how to bring that to individuals. Blackstone is the largest investor in commercial real estate; it’s also one of the largest private lenders and private equity investors… I think manager selection is quite key. But what we try to do is take the institutional-quality platform and pricing, and put that into an investor-friendly structure.’’

In terms of sustainability and ESG factors, Solotar notes that there are now more questions on Blackstone’s ESG approach from US and Asian investors compared to a few years ago. “We’ve laid out specific goals. For us it’s less about avoiding sectors, and more about improving assets. We have a goal, for instance, that in the acquisitions we make – whether real estate or companies – where we have full control, we aim to reduce carbon emissions by 15 per cent across the portfolio. We think there is a big opportunity in energy transition.

“If you’re a public equities investor, you can choose not to own an asset, or to vote on particular initiatives. Other than that, it’s hard to effect any change or to improve the asset. But when you own a private asset and you have control, you can change the composition of the board. You can try to improve energy and water usage, and really change how you impact the neighbourhood.’’

In a tougher economic environment such as stagflation, sector selection is key, she says. “We think a lot about the sectors we invest in, where there can be pricing power even in a stagflation environment.’’