Americas Issuer: Blackstone
When PE goes public
For drawing on its own capital markets sophistication to help its portfolio companies issue US$60bn of debt and raise more than US$15bn of equity while also delivering solid returns for LPs and new public investors participating in its deals, Blackstone is IFR’s Americas Issuer of the Year.
In January 2013, Blackstone’s imposing Park Avenue headquarters greeted some unusual guests. A pair of Magellanic penguins waddled their way through the private equity giant’s offices, posed for some Facebook and Twitter photos with executives, including boss Steve Schwarzman, met with the children of staff members and even left some reminders of their visit on the firm’s plush carpet.
The penguins were some of the stars of a new exhibit for the Orlando theme park run by SeaWorld Entertainment, a company bought by Blackstone in 2009 which it successfully took public in April.
It was a chance for the firm to associate itself with another high-profile family-friendly business and distance itself from the perception of ruthlessness that sometimes goes hand-in-hand with private equity.
Indeed, the softer image portrayed in recent years by some PE firms, or alternative asset management firms, as they now prefer to call themselves, could be dismissed as PR spin but it is also born of necessity.
It may sound like a contradiction in terms but private equity is now more public than ever. Many of the major US firms are now publicly traded companies themselves. Also, a large portion of their private equity investments are in publicly traded companies (31% in Blackstone’s case). That means winning the trust of a wider set of public investors, including those that have traditionally looked upon PE firms as sophisticated counterparties they should be wary of transacting with, has become a crucial part of the business.
For Blackstone, 2013 was a defining year both in terms of its leadership amid the industry’s ongoing image makeover and for the sheer volume of equity and credit market deals it and its portfolio companies had a hand in.
Not to mention the fact that Blackstone was, by at least one measure, the investment banking industry’s biggest individual client.
According to Thomson Reuters/Freeman Consulting data, Blackstone and its portfolio companies paid investment banking fees of US$519.5m during the awards review period, more than any company globally (private equity or otherwise) and well ahead of second-placed Carlyle Group with US$434m.
Leading the way
Led by its expanding in-house capital markets team, it took a handful of portfolio companies public, monetised a string of existing investments in publicly traded companies, undertook some of the biggest leveraged debt refinancings in its history, found some innovative ways to optimise the capital structure of both its private equity and real estate investments and led some of the most dominant investment trends of the year.
Amazingly, the US$60bn of debt issued by it and its associates and the US$15bn of equity proceeds raised came in a year when Blackstone did not complete any LBOs in its home US market.
“We are proud of the diversity of asset markets that we have been able to access,” said Vikrant Sawhney, the chief operating officer of the firm’s private equity group.
“For us, it always starts with the companies. Then you get to the financial structure. We have been able to bring companies to the markets from a wide range of industry sectors, but the common theme is that they tend to be market leading businesses that are growing.”
Helped by strong equity and credit markets, all the companies that Blackstone took public in the awards period – SeaWorld, Pinnacle Foods, PBF Energy, Extended Stay, Brixmor Property Group – have produced aftermarket gains for new investors (the same cannot be said for all sponsor-backed IPOs in 2013) and typically remain big holdings in Blackstone’s portfolios.
“We have built order books that are many times covered in almost all of those deals, which enables us to price in the middle/top half of ranges and then trade up appropriately in the aftermarket,” said Tom Morrison, the firm’s senior managing director of equity capital markets.
“We are really trying to price deals correctly rather than take the last penny off the table because we recognise that we are co-investors with public shareholders going forward.”
Though Blackstone is clearly more conscious than ever to ensure those co-investors continue to come back for more, it is hard to deny that 2013 has not been a spectacular year for private equity firms to take profits after a sustained rally in asset prices.
After all, 2013 was also the year that Leon Black, the head of one of Blackstone’s rivals, Apollo Global Management, unashamedly described market conditions as “biblical”, in the sense this was a time to reap gains on the investments sowed in prior years. He backed up his view by selling everything “not nailed down”, to use his words, and other firms were not far behind.
Blackstone, like some other private equity firms, was a judicious user of block trades and follow-on offerings during the year in order to reduce its holdings of publicly traded companies, taking full advantage of investment banks’ increased appetite for risk.
For instance, the US$776m monetisation in July of its remaining stake in TRW Automotive, a business Blackstone had owned for more than a decade, was struck at a 1.7% discount to last sale via a block trade handled by Citigroup.
In credit markets, the firm’s US$14.3bn refinancing of the debt of top-class brand Hilton – in preparation for the company’s IPO late in 2013 – was a landmark deal, a “wedding cake” of six separate transactions that minimised the cost of debt.
Hilton, rated BB–/B1 at the corporate level, had everything: CMBS, a property loan on trophy property Waldorf Astoria, leveraged loans and high-yield bonds.
Though leverage is clearly integral to the firm’s business model, Blackstone insists that it structures its public deals conservatively, matching the debt profile of companies with their industry and cashflow characteristics rather than take all of the leverage available.
“We get told time and time again by underwriters that we could do more leverage, but we back off to what we think is appropriate,” Morrison said.
Real estate revival
The revival of the US real estate sector has also played to Blackstone’s strengths.
Blackstone’s Invitation Homes division broke new ground and created a new asset class in 2013 with the first ever single-family rental or REO-to-rental ABS, which priced in early November. The US$479m deal, structured by Deutsche Bank, was multiple times oversubscribed and created a new way for debt investors to partake in the housing recovery.
The breadth of Blackstone’s involvement in capital markets and its ever closer relationship with the buyside is increasingly an issue for investment banks. Not only is Blackstone a highly sophisticated client, it is also increasingly looking like a potential competitor.
But Blackstone does not see itself going as far as rival KKR in seeking to “disintermediate” investment banks by providing the full suite of advisory and underwriting services even to external clients (for instance it will typically only seek co-manager rather than bookrunner roles of its portfolio company IPOs), but is clearly looking for opportunities to strike a happy medium.
Blackstone’s hedge fund solutions business (which invests in hedge funds), its credit asset management business GSO and its relationship with sovereign wealth funds and large pension funds as LPs represent an obvious advantage in its overall fundraising capabilities. With its private equity funds having delivered net realised IRRs of 21% since inception (and 27% for the real estate funds), the latter group have good reason to invest more alongside Blackstone.
“We have no ambition of disintermediating the banks but you have to have a direct two-way relationship with people that are actually buying your paper. You have to, it’s critical,” Sawhney said.
“The willingness to price deals with a longer-term view and spending much more time on proactive outreach to investors have been a huge focus for us. We must have a collaborative and ongoing relationship with the people that are actually buying our paper.”
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