When Godzilla principle size matters wins

Matein Khalid

Blackstone (BX) was founded with $500,000 in 1985 by two Lehman partners after a civil war at the I-bank forced its sale to American Express. BX had a meteoric rise from a small LBO boutique in Manhattan to the world’s first true alternative asset management colossus with $1 trillion in AUM.

I have rhapsodized about Blackstone in the Gulf/UK media ever since its shares fell from its catastrophic IPO price of 32 at the height of the credit bubble to its GFC lows in 2011 when the shares traded well below $8 and offered a 12% distribution yield.

Blackstone’s empire encompasses private equity, credit/insurance, real estate and hedge fund of funds. The firm has assembled the finest collection of deal makers, strategists, fund/risk managers and credit analysts I have ever seen on Wall Street. The AUM has grown from $730 billion in fee assets to $1 trillion in a mere six months, thanks to BX’s economies of scale, diversified product offering, stellar track record and vast status as the largest real estate investor in the world, a franchise built by my former Penn/Wharton classmate Jonathan Gray since 1992.

In this business, the Godzilla principle wins – size matters. BX generated more than $216 billion of net new capital inflows from the creme de la creme of the world’s institutional investors, from Ivy League university endowments to Gulf sovereign wealth funds, from the world’s largest pension funds to Japanese life insurers, Swiss private banks and the ultra HNW family offices of Silicon Valley’s tech titans whose AUM is invariably above $100 billion.

I had a lump in my throat when BX was added to the S&P 500 index last week as this firm has gifted some of the best M&A deals I have ever invested in my life like the $26 billion LBO of Hilton Hotels on the eve of the GFC that went from being a near total loss to a $14 billion bonanza for the LPs and a wildly profitable IPO on the NYSE. John Gray also acquired Sam Zell’s office empire and sold dozens of buildings at the peak of the cycle. He is also the brains behind the 10X profits generated for limited partners in resort hotels worldwide and the fascinating Bellagio casino/hotel deal.

Blackstone is now the preeminent owner of warehouses/logistics assets in Europe, America and Asia with more than 1 billion square feet of industrial real estate leased to the world’s biggest e-commerce retailers. Prologis is its only real rival in scale and domain firepower. Its warehouses have generated 10 to 12% rental growth in the past decade. Its recent opportunistic global real estate fund raised $30 billion from the planet’s smart money investors and a sheer scale and domain excellence. I will not buy BX at 109 as equity/credit cycle is set to take a nasty turn. Yet BX has more than $250 billion in dry powder and a pipeline of some spectacular LBO opportunities that will anchor the stock even as Powell’s interest rate shock guarantees the leveraged debt chickens come home to die on Wall Street.

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Also published on Medium.