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Blackstone Group’s private equity head, speaking at a recent Oregon pension meeting, said the frenzy for middle-market private equity deals has made the larger end of the market relatively more attractive than ever.
While many LPs are skeptical of megafunds’ ability to continue to provide top-tier returns, Blackstone’s Joseph Baratta said many “unloved” large companies or overlooked divisions of companies are good bets for the type of operational improvement that a firm like Blackstone can provide.
`Ability to underwrite’
“We have a large scale — $20 billion seems like a shockingly large number to manage. But our ability to deliver a $4 billion equity account to a counterparty as we did with taking the financial and risk division of Thomson Reuters in a corporate carveout and corporate partnership is differentiating,” Baratta said.
“We were the only counterparty on that transaction, so that ability to underwrite as much as $4 [billion] or $5 billion is really important, and we think that the large end of the market is relatively more attractive today than it has ever been.”
Oregon committed $500 million to Blackstone Capital Partners Fund VIII, which is targeting $20 billion, and previously committed $850 million to three earlier Blackstone funds since 2011.
“There’s a wide swath of companies in the $3 [billion] to $10 billion market cap of public companies, probably thousands of them in the U.S., that nobody really cares about,” Baratta said.
“They’re not well followed, they’re not well understood, they’re not particularly well managed — that’s where I think we’re going to live over the next five or six years in producing investment opportunities.”
Competition for middle-market deals has heated up in recent years and much activity involves one PE firm selling to another. Blackstone wants to be the first PE owner, where it can add the most value to a company that has untapped potential.
For Blackstone’s Fund VII, 70 percent of its deals were not part of an auction process and 80 percent of its capital was invested in primary deals, with no previous PE owner, Baratta said. By contrast, half the overall market for PE is secondary buyouts, he said.
Oregon’s private equity head, Michael Langdon, said Blackstone and Apollo Global Management are “owning the market” for complex transactions involving public companies, with KKR and TPG occasionally participating.
Langdon noted that targets of firm-to-firm sales often show growth, so it isn’t always that case that the initial owner “sucks out” the excess value.
Four allocation buckets
For Fund VIII, Blackstone is looking at four key allocation buckets: large-cap buyouts, buy-and-build, cyclical energy dislocation and Asia control deals.
Energy and Asia each should account for 10 to 15 percent of the fund, with about 45 to 50 percent to large U.S. buyouts and 25 percent in European buyouts.
Blackstone expects to take eight to 10 key positions in each of those four buckets, while remaining flexible on industry sectors.
“In terms of sectors, it’s hard to tell,” Baratta said. “I think we’ll do a little more in healthcare than we’ve done historically, given the big dislocation in the market and the changes coming in the U.S. and the focus on cost containment, different healthcare delivery models, and drug-price curtailing.”
Tech-enabled business services is another recent area of focus, but prices are high right now, Baratta said.
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