Blackstone warns that private equity cannot return capital ‘overnight’

Blackstone has said it will take time for private equity firms, which are sitting on record amounts of unsold assets, to return cash to investors even as the market for mergers and acquisitions comes back to life.

“I think we’re still in the early stages of the recovery phase that will ultimately allow private equity investors to return capital. It doesn’t happen overnight,” Jonathan Gray, president of Blackstone, told the Financial Times in an interview.

The world’s largest private equity group expects a rebound in dealmaking as financial markets loosen after two years of muted initial public offering and takeover activity caused by rising interest rates and geopolitical tumult.

Gray said Blackstone was “definitely seeing more transaction activity”, helped by lower corporate borrowing costs and a pick-up in bond issuance even as investors have curbed their expectations for central bank rate cuts.

Private equity groups such as Blackstone expect that falling interest rates will spur an increase in dealmaking that will allow the industry to exit $3tn of unsold private company investments. That, in turn, will allow them to return cash to large pension funds that are at present overexposed to unlisted investments and retrenching from making new private market bets.

Strong economic data in the US and mounting tensions in the Middle East have pushed back the date when the US Federal Reserve is expected to cut rates. Fed chair Jay Powell said on Tuesday it was likely to take “longer than expected” for inflation to reach the target level that would allow the central bank to cut rates.

Gray said he was confident financial markets would shrug off a slower than expected rate-cutting cycle. “I think, over time, the Fed will get some better data, it will give them room to cut rates. But the pace of that disinflation has slowed,” he said.

Gray’s comments came as Blackstone reported slightly better than forecast first-quarter earnings, which showed a significant increase in new investments, but a 17 per cent decline in the assets it was able to sell.

The New York-based group more than doubled the amount of investments it made to $25bn from $11bn a year ago. But it was able to sell just $15bn in investments, a steep decline from the $18bn of assets it sold in the first quarter of 2023.

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“Our confidence level that we’ll get to that stronger realisation environment is high. Picking the timing of that is harder,” said Gray.

The muted sales meant that Blackstone was unable to record significant performance fees from selling investments for a gain, limiting its overall cash flows. Net fees earned from investments sold for a profit fell 25 per cent in the quarter to $293mn, and have halved over the past twelve months.

Blackstone’s distributable earnings — a metric considered a proxy for cash flows — rose 1 per cent in the first quarter to $1.3bn, slightly beating analyst estimates. The metric includes performance fees earned from asset sales.

The group’s results were buoyed by strong growth in its credit and insurance business, which has $330bn in assets and helped propel Blackstone’s overall assets to $1.1tn.

Wealthy individual investors also poured more than $8bn into Blackstone’s funds, including $2.7bn for a recently launched private equity fund targeting so-called retail investors.

Gray also forecast market conditions would continue to improve despite the uncertainties of wars in Europe and the Middle East, and the upcoming US presidential elections.

“There have been so many geopolitical shocks in recent years . . . people are a little bit more desensitised,” he said.