Long-term fund strategies, only an idea a few years ago, have come of age as investors see early evidence of performance, Joe Baratta, Blackstone’s global head of private equity, said in an interview with sister publication Buyouts.
Blackstone secured $8.2 billion for a second long-life offering, 70 percent more than the strategy’s 2016-vintage debut fund. Commitments from new limited partners, along with significant re-ups from Fund I LPs, attest to “more interest in the concept” today relative to four years ago, Baratta said.
“The idea of holding investments in a single vehicle with a 20-year view, an efficient fee structure, and an ability to compound returns, is now an asset class,” Baratta said.
Blackstone is a pioneer of long-term investing. It began talks with investors in 2013 about options for owning assets beyond the traditional PE hold of three to five years as a way of maximizing value for certain business types. LPs were intrigued, especially large institutions with long horizons.
Blackstone designed its core long-hold strategy to invest in “durable, high-quality companies with predictable cash flows and based in non-cyclical sectors,” Baratta said. Opportunities, expected to be held for at least a decade, would be sourced by the same team overseeing the flagship PE pool.
Fund I put the thesis to the test. It backed about half a dozen companies, among them SESAC, a music rights organization that manages licenses for singers like Adele and Bob Dylan. Acquired in 2017 from Rizvi Traverse Management, it was the strategy’s first transaction.
More recently, the fund invested in Merlin Entertainments, an operator of iconic visitor attractions, such as Madame Tussauds and Legoland. Blackstone last year teamed up with Kirkbi and Canada Pension Plan Investment Board to buy the business in a $7.5 billion deal.
Blackstone and Kirkbi together owned Merlin in the years prior to its 2013 public listing. Baratta said a renewed investment for a decade or longer is “the best way” to optimize the company’s unique intellectual property and brand.
Investing since 2017 has “proven Blackstone’s model successful,” Baratta said. At the end of September, Fund I was generating a multiple of 1.5x and a net IRR of 17 percent, according to the firm’s Q3 2020 report.
Staying the course
Fund II will maintain the strategy established by its predecessor. With a larger pool, it will be less “capital constrained” than Fund I, Baratta said, enabling deployments to “a few more deals.” Blackstone typically invests $500 million to $1 billion-plus per transaction.
Additional firepower will be provided by LPs with direct deal capabilities. Disclosed Fund II investors include California Public Employees’ Retirement System and CPPIB, each of which committed $1 billion, and California State Teachers’ Retirement System, which committed $425 million.
Blackstone uses a single team to actively manage all PE-backed companies. There are, however, differences in approach. Unlike traditional investments, which see intensive value-adding activity, “there is no wholesale business transformation required to generate the return” in the long-hold portfolio, Baratta said.
Long-hold assets will nonetheless benefit from active engagement with Blackstone, Baratta said. This includes access to a full range of tools in the firm’s operations group.
As candidates for long-term investing must meet a high bar, Baratta said Blackstone has to be “a good analyst of businesses, sectors and capital structures and able to attract the best possible management.” This, he added, is “key to performance.”
Blackstone is the largest player in a growing club of long-life fund managers. Others are Altas Partners, which last year closed a second fund at $3 billion; BlackRock, which is seeking as much as $12 billion for its strategy; CVC Capital Partners, which in 2019 closed a second fund at €4.6 billion ($5.4 billion); and KKR, which two years ago collected $8.5 billion.
Silver Lake has also entered the space, announcing in October a partnership with sovereign wealth fund Mubadala to invest $2 billion over a 25-year period. (Read Buyouts‘ recent story, The long, long hold.)
More players could follow, as the volatility created by covid-19 reinforces for LPs the importance of long-term fund strategies. Some investors focused on the high IRRs and liquidity of traditional PE may not, however, be ready for opportunities with a longer pay-off, Baratta said. “Not everyone,” he said, “is comfortable with that.”