Size isn't everything; it's what you do that counts

By Paul Mackintosh - 21/10/13
The Blackstone Group has just released third-quarter financial results that will provide some comfort to private equity (PE) investors, even without the resolution of the US debt standoff. According to Chairman and CEO Stephen Schwarzman: “In the third quarter of 2013, Blackstone attracted US$12 billion of organic capital inflows, and $53 billion in total inflows over the past year.” Profits overall, meanwhile, rose 3%, with third quarter revenue $1.23 billion – all of this on or slightly under expectations, but hardly any evidence of underperformance. And, Mr. Schwarzman added: “Despite greater realisations, we grew total assets under management by 21% year over year, to a record $248 billion.”
Mr. Schwarzman also outlined some of the reasons for that success – and its benefits for investors. “We are actively deploying this capital, as our global scale and diversification allow us to source investment opportunities around the world, providing the foundation for strong future returns. At the same time we are seeing increased momentum in realising gains for our fund investors, with $6.7 billion of total realisations in the third quarter and $26 billion over the past 12 months.”
If anyone can think back as far as Blackstone’s somewhat controversial listing back in 2007 with its first-day drop and Chinese red faces, it’s comforting now to see that the whole story has built solidity and depth, and both the principle of large private equity groups going public and Blackstone’s listed platform now seem thoroughly established and proven. It’s also interesting to note that KKR, one of the few among the big-name-brand buyout titans to go public that actually produced a respectable performance at its IPO, is the firm to have made the biggest public missteps more recently, with its latest US buyout vehicle closing well below target. 
Blackstone, on the other hand, seems to be going from strength to strength. Its AUM is now comparable to the largest global pension funds, such as CalPERS’s $265.1 billion and CPPIB’s C$183.3 billion (US$178.14 billion). Its quarterly earnings are not far behind Goldman Sachs’s approximately $1.5 billion. 
So what’s the answer? Is big beautiful? Mr. Schwarzman certainly talked plenty about scale, but I think diversification is just as important to his group’s success story. Blackstone operates private equity, credit, real estate, and advisory business lines: weakness in one can be offset by strength in the others. It also appears to have a creditable bias towards investment and value enhancement rather than fundraising and marketing. Building a platform along those lines, rather than purely going for size for its own sake, seems to be the right model at this scale these days.