Blackstone Private Equity Strategies CEO Sees Big Opportunity In Private Markets

Key Concepts

• Public vs. Private Markets: The shift in market dynamics where a larger percentage of companies, particularly those with significant revenue, are now privately held.
• Alternative Asset Management: The management of investments outside of traditional stocks, bonds, and cash, with Blackstone being a leading global player.
• Private Equity Strategies: Investment strategies focused on acquiring and managing private companies.
• Democratization of Alternatives: Making alternative investment strategies, traditionally accessible only to institutional investors, available to individual investors.
• Perpetual Capital Vehicles: Investment structures that allow for ongoing capital contributions and redemptions, offering more liquidity than traditional drawdown funds.
• Drawdown Structures: Traditional private equity fund structures where capital is called from investors as needed for investments.
• Franchise Business Models: Business models where a company licenses its brand and operating system to independent operators (franchisees).
• Core Satellite Approach: An investment strategy where a core portfolio is built with stable, diversified assets, complemented by smaller, more specialized "satellite" investments.
• Relentless Pursuit of Excellence: A core cultural value emphasizing high standards, integrity, and striving for market leadership.

Blackstone's Growth and Verl Patel's Career Trajectory

Verl Patel, CEO of Blackstone Private Equity Strategies, discusses his 20-year career at Blackstone, the world's largest alternative asset manager with over a trillion dollars in assets under management. Patel highlights his diverse roles within the firm, including launching the tactical opportunities fund, working in growth equity and credit, and most recently, leading private equity strategies for individual investors. He attributes his career progression to an "openness and willingness to say yes" to new opportunities across various asset classes, a trait that aligns with Blackstone's entrepreneurial culture.

The Shift Towards Private Markets

A significant theme is the growing importance of private markets. Patel notes that while public markets are perceived as shrinking, private markets are experiencing substantial growth. This is evidenced by the fact that 86% of companies with revenues exceeding $250 million are now private, a reversal from past trends where going public was the primary goal for growth funding. This shift is driven by CEOs focusing on building great businesses rather than solely on the source of capital.

Investor Allocation and the Opportunity in Private Markets

Patel elaborates on the disparity in capital allocation between institutional and individual investors. Institutional investors, such as pension plans and sovereign wealth funds, allocate 20-30% or even 50-60% (for families and endowments) to private markets. In contrast, the average individual investor allocates less than 3%. This gap represents a significant opportunity for individual investors to benefit from the two key advantages of private markets: complementary exposure and diversification, and enhanced returns.

Blackstone's Private Wealth Business and Education Initiatives

Blackstone recognized the trend towards private markets early, launching its private wealth business in 2011. What began as a single distribution partner managing $10 billion has grown to $290 billion in capital within the private wealth channel, supported by 300 investment professionals. Patel emphasizes that this is not just a sales function but an end-to-end offering designed to educate distribution partners, financial advisors, and clients about alternative asset classes. He stresses the early stage of individual investor participation in alternatives (less than 3%) and the critical need for education.

Blackstone's educational efforts include "Blackstone University," an initiative that allows financial advisors and clients to visit Blackstone, learn about its products, and hear directly from business leaders about their private market strategies. The focus is on explaining the importance of private equity and private markets as part of a diversified investor portfolio.

Evolution of Individual Access to Private Equity

Looking ahead, Patel anticipates a significant secular shift over the next 5-10 years as individual investors increase their allocations to private markets. A key driver of this evolution is the advent of perpetual capital vehicles. Unlike traditional drawdown structures, which are less liquid and suited for institutions, perpetual structures offer periodic liquidity and monthly subscriptions. Blackstone has successfully implemented these structures in real estate, credit, private equity, and infrastructure, making private markets more accessible to individual investors.

These new structures provide greater flexibility, allowing investors to rebalance portfolios. This enables financial advisors to engage with clients on a more nuanced basis, discussing not just equity and fixed income allocations but also the split between public and private investments within those categories. This fundamentally changes how clients can express investment ideas and access a wider range of strategies.

The Appeal of Private Markets for Passion Investments

The private markets also offer individuals the flexibility to invest in areas they are personally passionate about, such as women in sports or sustainable investing. With 86% of companies over $250 million in revenue being private, a vast portion of the global economy operates within these markets. As managers develop more tailored products for individual investors, access to niche areas becomes more feasible.

Ripple Effects on Wealth Management

Patel predicts that the 3% allocation to alternatives for individual investors will increase meaningfully. Investors will likely view these categories as more accessible and will allocate more capital. A "core satellite" approach is expected, where perpetual products form a stable base of capital and exposure, while satellite offerings cater to specific interests like sports or sustainability. These perpetual capital vehicles, when well-structured, can offer breadth, diversification, and attractive returns.

Blackstone's Investment in Franchise Models: Jersey Mike's and Seven Brew

Blackstone's conviction in the consumer franchise space is exemplified by investments in brands like Jersey Mike's and Seven Brew. Patel explains that the attractiveness of these businesses lies in their underlying franchise business models, which offer rapid growth potential. Franchisees fund capital expenditures and hiring, leading to high margins, low capex, and strong free cash flow for the franchisor.

Blackstone leverages its data science team to identify optimal locations for new store openings by analyzing existing store performance, SKU margins, local demographics, and mapping this data across the US. This data-driven approach, combined with strong business models, creates a win-win scenario. Blackstone's history in franchising includes investments like Hilton in 2007.

Global Investment Opportunities: India and Japan

Beyond the US, Blackstone sees significant opportunities in two international markets:

• India: Blackstone's best-performing private equity market over the last decade. The firm is attracted to India's pro-business government, heavy infrastructure investment, and the growing domestic economy driven by a rising middle class. Service-oriented investments catering to this demographic, including financial services and real estate, are particularly promising. Micro-lending is also an area of interest within the broader financial services landscape.
• Japan: The Japanese economy is transitioning from a saver to a growing economy with increasing investment rates and inflation. Blackstone identifies significant "trapped value" due to limited foreign direct investment. The firm focuses on repurposing, reimagining, and reinvigorating assets for growth, adding substantial value.

Entrepreneurship within a Large Organization

Patel defines entrepreneurship within a large institutional organization as stemming from the "tone from the top." Steve Schwarzman and John Gray have fostered an entrepreneurial spirit at Blackstone, which was founded by Schwarzman. The firm cultivates an environment where growth is prioritized, and a forward-looking approach is expected. Hiring individuals who share this entrepreneurial mindset is crucial.

Leadership Lessons: The Importance of Culture

A key leadership lesson learned from Steve Schwarzman and John Gray is the paramount importance of culture, especially for scaling a business. Blackstone's management committee consistently focuses on cultivating and embedding its culture. A core tenet is the "relentless pursuit of excellence," which is expected of every employee. This culture, built over decades and requiring continuous investment, emphasizes high integrity and striving for market leadership. Patel asserts that getting the culture right is critical for scaling businesses of any size.

Excitement for the Future of Alternative Investments

Patel expresses immense excitement about the evolution of alternative investments and the wealth space over the next 5-10 years, primarily because of how early the market is. He anticipates significant innovation in product development tailored for individual investors. Blackstone's private wealth team is positioned at the forefront of driving this change, and Patel believes the industry will be "pleasantly surprised" by the innovation to come.