Blackstone’s Gray: Inflation is the ‘major risk’ today

The alternatives asset manager had one of its strongest quarters, with total AUM rising 21% year-on-year to $649bn.

Inflation is the “major risk that’s out there today”, said Blackstone‘s chief operating officer.

Speaking on the asset manager’s first-quarter earnings call last Thursday, Jon Gray said the firm will respond by targeting businesses with “real tailwinds” whose growth can offset the pressure placed by higher inflation on multiple expansion.

“You see that in… tech and life sciences and global logistics. In this quarter, we talked about a big push into the covid recovery travel play, which we did in a number of businesses around the world,” Gray said.

Parts of the sustainability sector, such as green electrification, and types of real estate in which rents can be raised annually will also play a role in combating inflation: “What we’re trying to do is position ourselves for things that look and feel as the least bond-like as possible,” Gray said.

Asked whether a rise in inflation could prompt the Federal Reserve to raise interest rates, potentially making alternatives less attractive on a risk-return basis, Gray said that a small increase in rates would not be enough to trigger a broad wave of re-allocation.

“If you think about our clients, oftentimes big institutions still have targets of 7 percent or so. So the absolute level of interest rates and what they can get from fixed income doesn’t meet their targeted returns,” he said, adding that alternatives had become “an accepted asset class” in the eyes of investors.

Blackstone had one of its strongest quarters, with total assets under management rising 21 percent year-on-year to $649 billion. Fee-related earnings rose 58 percent to $741 million and management fees increased 25 percent to a record level of $1.2 billion, the firm said on the call.

Strong investment performance generated $1.7 billion of net accrued performance revenues firm-wide during the quarter and drove balance sheet receivables up 36 percent to $5.2 billion, the highest level in Blackstone’s history and nearly 30 percent above pre-crisis levels.

“The virtuous cycle of strong investment performance leading to further inflows, increasingly from perpetual strategies, continues to drive our firm,” Gray said.

Among the funds Blackstone closed in Q1 were its debut growth fund, which raised $4.5 billion by final close in March. In April the firm appointed Paul Morrissey from Battery Ventures to lead its European Growth business, afilliate title PEI reported.

The firm also held a $3 billion first close for its second Asia-focused private equity fund, which is targeting $6 billion and is already larger than the first.