Right now, there are a couple of very important things going on in the world.
First, the institutional world is starved for decent returns. Pension funds and large investment funds cannot find enough opportunities to create the yield and return that they need.
Second, interest rates globally are among the lowest they’ve ever been, and it looks like they’re probably going to stay that way for some time to come.
That is fantastic news for the private equity industry. The search for higher returns and low interest rates is a combination that makes it possible for private equity firms to survive and thrive and deliver huge returns for their investors.
Over the years, private equity firms have been painted as “the bad guy” that does leverage buyouts, fire people and burn companies to the ground… But that’s really not the case.
Yes, that does happen on occasion for bloated companies, but a lot of companies that were purchased by private equity firms also started to grow at a much higher rate and were actually hiring people to fill new positions.
More importantly, private equity is the leading source of returns for some of the world’s largest pension funds, including those for schoolteachers, firefighters and nurses.
All of them depend far more than they realize on private equity firms to provide them with the returns that have made their comfortable retirement years possible. Without private equity, that check they get every month would be a lot smaller.
Private equity is really active in what we call “private credit markets.” They’re actually lending money to small and mid-sized firms across the United States that are looking for sources of growth capital or capital fund a deal of their own.
Whatever it is, private equity is now very big in that private credit space. And why shouldn’t they be? They’ve borrowed trillions of dollars of the decades and paid most of that back as the companies were eventually sold. Nobody knows more about borrowing money and paying it back than private equity firms.
Why not use that expertise to become a lender? Well, they’ve done that. And it’s just another source of return for large institutions and some individual investors in what is very much a yield-starved world.
A lot of the big private equity firms have business development companies attached to them, which gives individual investors a chance to get yields of 8%-10% on their money even in this low-interest-rate world.
Private equity has also become one of the biggest real estate investors in the world. They’re buying hotels, office buildings, apartments and even single-family rental homes. They’re in every aspect of the real estate market, and they are long-term patient money with a lot of cash coming in.
Real estate has been delivering great returns for their investors, and they are here to stay. They will continue to be a bigger part of the commercial real estate markets over the foreseeable future.
Now, there are several publicly traded private equity companies, and the high growth they’re experiencing is really starting to attract the attention of the big investing institutions that invest in public stocks.
One in particular that is starting to really exhibit that smooth, up-and-to-the-right momentum that we like to see is Blackstone Inc. (BX), one of the largest private equity firms in the world.
They have put up huge returns in their private equity buyout funds over the years, but they have expanded quite a bit in recent years. They are now one of the largest owners of real estate in the entire world.
They are the second-largest owner of industrial real estate in the world, including warehouses and shipping space. They’re getting huge tailwinds from the explosion of e-commerce since the pandemic, and the global remaking of the supply chain is going to create enormous demand for warehouse space.
They own a lot of it, and they’re going to be collecting some pretty big rent checks off of all of this real estate across the world and passing that on to their investors.
They’re also very involved in life sciences, technology and they’re starting to focus some of their buyouts and special situation funds on those markets. They’re also very active in private credits, with several funds that are making loans to businesses, so they’re much more than just buyouts.
Now, let’s take a look at some of the things they’ve done recently to get a better idea of what BX is all about. They just bought a life sciences logistics company that helps biotechnology and pharmaceutical companies get their products from the lab to the store shelves.
They are also the majority owner of SPANX, the women’s clothing-maker that has become so popular. They bought Condor Hospitality Trust, a hotel real estate investment trust with properties all over the US.
They bought Renaissance, a K-12 education company, as well as a big investment data group that processes and analyzes big data to help companies make decisions. They also put $250 million into a company that’s working to cure leukemia, and they also bought a huge self-storage operation down in Australia.
So, this is more than just leveraged buyouts. BX is investing in growth companies with bright futures and opportunities, they’re creating jobs, they’re buying real estate… And all of this is really driving earnings growth.
BX is going to grow at 25% a year for at least the next five years. The last four quarters in a row, they have blown away analyst expectations, with four big positive earnings surprises, and analysts are now scrambling to raise their estimates.
All of this is attracting a lot of attention from institutional investors. We’re seeing the money pour into BX shares, driving the stock up and to the right, and based on the continued return- and yield-starved environment, Blackstone’s profits and stock price should drive a lot higher over time.
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