Blackstone Inc. reported "the most remarkable results in our history on virtually every metric" in 2021 and expects to hit $1 trillion in assets under management in 2022, a milestone executives in 2018 thought was eight years away, said Chairman and CEO Stephen Schwarzman on a fourth-quarter earnings call.
In 2021, the company raised more than a quarter-trillion dollars, increasing AUM 42% to $881 billion.
Blackstone reported record highs in terms of fee-related and distributable earnings. Fee-related earnings was up 144% year over year for the fourth quarter to $1.8 billion and up 71% compared to 2020 to $4.1 billion.
Distributable earnings increased 55% in the fourth quarter over the same period a year ago to $2.3 billion and increased 85% compared to 2020 to $6.2 billion.
"Across the firm, we are exceptionally well positioned to continue growing in a way that is unprecedented in the alternative asset class, and I couldn't be more confident in our momentum despite a significant correction underway in the global markets," Schwarzman said.
Targeting retail investors
AUM growth has several drivers, including limited partners increasing allocations to alternatives while concentrating investments with a few proven managers, "which favors Blackstone," the CEO noted.
Additionally, the retail investor channel, from which the firm raised $50 billion in equity capital in 2021, presents a large opportunity. Schwarzman said U.S. households had socked away $2.8 trillion in savings since the onset of the pandemic.
"[T]he retail channel is dramatically underallocated to alternatives," Schwarzman said. "And the kinds of increases that some of the distributors are hopeful of achieving is at 3x, 4x increase. And this is a massive pool of capital."
President Jonathan Gray also mentioned the growing demand for alternatives from retail investors. Gray predicted that a rise in interest rates combined with sustained inflation would bring more retail investors to Blackstone because of its products to protect capital from inflation, such as floating-rate debt.
"The idea of trading some liquidity for a yield-oriented product, where yield actually grows with rising interest rates becomes increasingly attractive," Gray said.
Inflation was a key topic on the call. Executives acknowledged inflation as a challenge, but Schwarzman said Blackstone's scale and product breadth position it well. The CEO pointed to the company's $280 billion real estate business, which is heavily invested in logistics, rental housing and life sciences office space. Relatively short lease terms in those sectors give the opportunity to reprice in step with inflation, Schwarzman said, adding that the rising cost of new construction will benefit its current holdings.
He was similarly positive about the ability of the company's private equity business to ride out a period of inflation, noting that holdings were "concentrated in areas with strong secular growth that are more resilient to rising input costs." Blackstone's operating companies reported 23% year-over-year growth in revenues in the fourth quarter, which Schwarzman called "really stunning."
Blackstone holds $136 billion in dry powder across all its investment strategies. Schwarzman said the company has an advantage in an environment of rising interest rates. "We can move quickly to invest when pricing becomes more favorable."
High-tech valuations
Gray said the anticipation of tax changes in the U.S. drove some of private equity's 2021 surge in deal volume. However, Gray predicted that a healthy U.S. economy would continue to produce "decent transaction volume."
The slide in public markets "definitely engaged more conversations with us and the companies out there." Gray said deal volume will "probably pick back up."
Technology companies, which make up a growing percentage of the firm's private equity portfolio, are poised for continued growth, despite the recent battering tech stocks have taken in the public markets, Gray said.
Blackstone portfolio companies expect to increase tech spending 15% to 20% in 2022 after recently doubling their outlays for software and digital infrastructure, Gray said. Moreover, long-term trends such as the growth of e-commerce and the cloud continue.
"Yes, some of these stocks certainly got to levels that didn't make sense," Gray said. "We've now seen a pullback. But I wouldn't now say, therefore, technology, technology services, content creation, this stuff doesn't make sense to invest in. We think it could lead to more opportunities and more rational pricing. And we really like the portfolio of businesses we're invested in."