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Blackstone increased its pace of investing to a two-year high in the second quarter as the world’s largest alternative asset manager prepared for the US Federal Reserve to begin cutting interest rates.
The head of the New York-based private investment group told the Financial Times that there were signs inflation of waning across its portfolio, including in its giant $336bn property business.
“The Fed has and will have air cover to cut rates,” said Jonathan Gray, president of Blackstone. “Their medicine has been working.”
Blackstone deployed $33.7bn during the quarter and committed a further $19.1bn to new investments, its most active three-month period since 2022. Gray said the uptick in dealmaking reflected “our decision to invest before the all-clear sign, prior to the Fed cutting rates”.
Speaking as the group reported a 3 per cent year-on-year increase in distributable earnings — a gauge of cash flows — that was slightly below analysts’ estimates, Gray said he believed the US central bank would soon have the opportunity to loosen monetary policy as inflation and the job market cooled.
“Wage pressures have come off, and when we survey our companies, they are saying it is much easier to hire,” he noted. In its property portfolio, rents were rising more slowly than government data suggested, he added, which would in time feed through to official inflation data used by the Fed to set rates.
Investors are betting the Fed will cut rates by half a percentage point this year after 12 months in which policymakers have held interest rates between 5.25 and 5.5 per cent.
The central bank’s campaign to tame inflation has reverberated through markets since it began lifting rates in 2022, with many companies struggling to cope with higher borrowing costs.
It also knocked valuations of many businesses, including those owned by private equity firms. That curtailed dealmaking, and buyout groups — reluctant to take losses on the companies they bought — are now sitting on record amounts of unsold investments.
Gray said Blackstone was keen to keep putting money to work in new investments, especially given valuations were no longer stretched as high as they were in 2021 and early 2022. Auctions for businesses are “not nearly as heated” as they were before the Fed kicked off its rate-raising cycle, he added.
“Your purchase price is permanent,” he said. “Your borrowing cost is temporary. While the borrowing cost is higher, you are better deploying capital.”
Blackstone has started exiting some of its investments, although Gray noted that so-called realisations were “still well down from where they were prior to the sharp rise in rates”.
The company sold $23.5bn of investments during the quarter, up from $17.2bn a year earlier. The figure was buoyed by its fast-growing credit and insurance unit, which accounted for two-fifths of its exits during the period.
The uptick in deal activity after a fallow 18 months was repeatedly highlighted by executives on Wall Street this week, as investment banks reported some of their best results in years. Some bankers expect dealmaking could spike if former president Donald Trump wins the US election.
“The approach towards antitrust will likely look very different from what we’re seeing today if you had a change towards a Republican administration,” Gray said when asked about the impact of a possible Republican sweep of the presidency and Congress in November.
“And I think if you talk to investment banks, obviously the cost of capital has been an impediment to deal volume, the IPO market has been an impediment, but the approach to antitrust has also slowed things down.
Gray signalled the fundraising environment was also starting to improve. Blackstone counted $39.4bn of inflows in the quarter, lifting its assets under management by 7 per cent to $1.1tn.
“With institutional investors the tone is getting better,” he said. Factors that had pressured investors to cut back their allocations to private capital had receded, and more of their investments were starting to be realised, Gray added.
