Tracing Blackstone's Investing Strategy

In these times of interest rate uncertainty, it is fascinating to look at the priorities and strategies of one of the world’s great long-term investors — the Blackstone Group.

The private capital group has some $A1.5 trillion in the under-management kitty so capital providers also rate it highly. Blackstone has isolated six major category trends that currently underpin its investment criteria.

So, let’s apply those six trends to some of the investment strategies that are emerging in Australia. 

Electrification

Blackstone recognises that one of the biggest areas in Australian investment in the next five to 10 years will be in the generation of power via solar and wind and in new transmission lines. 

These are areas where investors like Blackstone can gain a reliable income because the power retailer basically operates on a fixed remuneration/price basis. We have not seen a lot of these sort of investments in the public arena, which is a pity.

But, down the track, opportunities will arise to invest in the electrification of Australia. Blackstone do not include mining in their list of Australian priorities whereas most Australian smaller investors seeking to gain returns from electrification are looking at miners of copper, nickel, cobalt, lithium and rare earth minerals. Stocks in this sector have risen strongly.

All the signs are that within one to two years there will a shortage of copper that will trigger new mines, and because it takes such a long time to gain approval and develop a mine, there will be a delay factor which will cause considerable shortages of copper. 

Right now, the sluggish Chinese economy is causing a build-up of copper stocks and depressing the price and this will delay the impact of the looming copper shortages as the result of electrification.

Naturally, investing in electrification via mining involves greater risk than undertaking it via an existing transmission network or generating capacity. 

Digitisation

The next criteria is what Blackstone call “digitisation”. In Australia that tends to push you into high technology companies developing a base technology which can be high risk. But there is no doubt that we are going to see around the world and in Australia breakthroughs in technology that will generate large profits.

Sadly, Australian companies tend to sell out at an early stage of development and the big profits go to international players. Maybe that will change.

Life Sciences

Another area of dramatic change coming to the world is via life sciences and medicine and companies that obtain breakthroughs will enjoy spectacular rewards.

But the business of getting approvals in America and elsewhere is slow and cumbersome.

In 2021, Blackstone acquired the Nucleus Network, Australia’s largest phase-one clinical trials provider, with world-class facilities in Melbourne, Brisbane and Minneapolis. 

As Blackstone saw it, Australia is a globally leading destination for clinical trials, supported by the country’s open regulatory regime, strong talent pool and distinguished research and healthcare facilities.

They believe phase-one trial volumes in Australia will grow significantly, driven by the increasing demand from offshore biotech companies to conduct speedy and reliable trials. 

Private Credit

The fourth Blackstone investment benchmark is a fascinating one – private credit. In past years, when bank lending was abundant, Australian private credit providers had to take extreme risks to get major shares of the market.

But in the US, it is quite regular for sound companies to borrow at interest rates of around 10 percent and we will now see more of that in Australia given that our inflation rate is in the six per cent range.

It’s a market that is not easily tapped by smaller investors but on the Australian corporate bond market, rates of seven and eight per cent are now common. And given that Blackstone has set high interest loans as an investment pillar I think we will see more of them in Australia.

The problem with higher rate lending is that if you make a mistake and the company to which you have loaned goes under, causing your loan to be wiped out, then the returns on the remaining loans are often not sufficient to cover the losses. 

So, it is an area that needs a lot of care, but Blackstone see it as a highly attractive way of allocating money. 

Interestingly, in the private credit area, they don’t include banks. Here in Australia, in former times, banks had specialised finance companies that participated in providing private credit. Most of the banks went on to acquire their finance companies, many of whom got into trouble by concentrating too much on property loans. In the acquisition process, the expertise of providing private credit was lost.

I believe that some of our banks are now again developing their skills in this area, and they will need to because I fear home lending is going to be relegated to a commodity product and won’t deliver the sort of returns we have seen in the past. And, of course, the higher housing rates of interest increase problem loans.

This week I ran into a situation where a Hong Kong group loaned $80 million to a small, listed Australian company, Intelligent Monitoring Group (ASX: IMB), which was valued on the share market at only $15 million.

The base interest rate was a hefty 10 per cent but there were also some up-front fees and equity sweeteners. The company was able to justify such a huge borrowing because it purchased the leading home and commercial security brand in the country from an American company that wanted to exit.

The rates were high because the acquisition cost of $45 million was three times its market capitalisation. But the margins on the deal were so great that the main shareholders were prepared to pay the borrowing price to get the deal done. 

Property

The next area of Blackstone investment will stun a lot of people – property.

The listed property trust market in Australia has been smashed, particularly in the office and retail areas. Our industry superannuation funds have large amounts of money invested in direct property which often has not been reduced to current values. That will provide a challenge in the property market, but our listed property sector is down substantially.

Blackstone are particularly interested in logistics and warehousing property where there are high occupancy rates. And they also interested in build-to-rent projects — an investment area new to Australia.

Leisure and Travel

Blackstone picked up a bargain when they purchased Crown Resorts when it was in a troubled state.

The sixth of the Blackstone investment pillars is "leisure and travel" so Crown fitted into that pillar extremely well. Because James Packer had to sell to retain the Crown licence, Blackstone was able to gain control at a price that did not take into account the potential of the Sydney assets.

Meanwhile, Blackstone have improved the management of Crown in Melbourne and also invested there. And having made that leisure and travel investment they will probably be looking for more. 

None of us are in the position of Blackstone, with virtually unlimited capital resources, but it is worth testing your portfolio against those criteria.