Just nine months since joining one of the world’s biggest multi-asset managers, Jon Korngold is putting the finishing touches on Blackstone Group’s new growth equity platform.
Korngold assembled a team of about 20 executives, he said during a keynote address at PartnerConnect West earlier this month. This includes Ram Jagannath, formerly of Carlyle Group and Navab Capital Partners, who will lead Blackstone’s healthcare efforts for the growth-equity strategy, Buyouts reported in August.
Korngold, a Blackstone senior managing director and global head of Blackstone Growth, said everyone on the investment team is “authentic to growth.” Executives are coming from within Blackstone and also from firms like TCV, Andreessen Horowitz, NEA, Vista Equity Partners, TPG Growth and General Atlantic. The team is diverse, with women and minorities represented, he said. Women, in fact, make up 40 percent of the team, a source said.
“The luxury of starting with a blank sheet of paper is that you get to create the exact culture of the firm that you want to work in,” Korngold said during the Sept. 25 keynote. “That’s incredibly rewarding.”
Blackstone Growth will focus on companies that are between early-stage venture and traditional buyouts. Sectors include financial services, healthcare, enterprise technology and consumer, as well as consumer technologies.
The growth team will have the ability to provide equity checks of between $400 million to $500 million, Korngold said. It will seek minority positions but can also do majority stakes and smaller deals, the person said. The growth team reportedly closed two transactions so far, including Vungle, the mobile ad company, which the firm announced in July.
Blackstone Growth plans to have a strong presence in San Francisco, in addition to its offices in New York and London, he said.
“We’re going to make a huge push into the San Francisco market,” said Korngold during the keynote. “It’s a hotbed and lifeline of growth equity and technology investing.”
Blackstone has always done growth deals. Many times, the firm used its tactical opportunities platform to invest in growth, particularly when the deals involved a minority stake, the person said. Blackstone Tactical Opportunities makes opportunistic investments in deals that are time-sensitive, complex or in dislocated markets.
Korngold did not address Blackstone Growth’s fundraising plans.
Korngold surprised many when he left General Atlantic after 18 years to lead Blackstone’s growth platform, Buyouts reported in January. During Korngold’s tenure, GA took part in some of the biggest fintech deals, including Ant Financial’s $14 billion fundraise in June. Other transactions included Argus Media, OptionsHouse (which was sold to E*Trade in 2016 for $725 million) and Avant.
When asked why he exited GA, Korngold said he had worn many hats at the growth firm, including running the healthcare and financial services groups at different points. “I had a front seat at growth equity and how it was evolving,” he said.
He realized, when the Blackstone role came along, that he would regret not taking this position. Few growth firms have experience with the “end stage,” he said. The irony of growth equity, Korngold said, is that companies often seek growth funding because they want firms with the “know-how” to take them to the end stage. But growth firms are focused on companies in their adolescence. Blackstone, by comparison, has 35 years under its belt partnering with companies and experts at the end stage.
Empire Strikes Back
Financial services, more than any other sector, has undergone tremendous innovation, Korngold said. But he worries about the “euphoria” surrounding fintechs. “Fast forward four to five years in time, we’re going to look back at this era of fintech investing and realize that there are many more casualties than successes,” Korngold said.
Traditional banks, in many ways, have been held back by regulations, he said. Non-banks, meanwhile, have surged in popularity. Some of these companies have produced great apps, have great customer service and are experiencing tremendous growth, Korngold said. This success has led to some in fintech to think traditional banks are “dinosaurs” that can’t get out of their own way.
Korngold doesn’t agree, highlighting JP Morgan, which budgeted $11 billion on technology spending in 2018, and Bank of America, which earmarked about $16 billion. “Even if they’re woefully inefficient, they could still dwarf what any standalone non-bank fintech can do,” Korngold said of JPM’s IT budget.
The idea that a fintech could displace a bank is a “fool’s errand,” Korngold said. “There is no chance that’s going to happen,” he said.
Banks, however, are realizing that they can’t build everything themselves. Instead, they can partner with fintechs and peacefully co-exist. “In some ways it’s an Empire Strikes Back moment for banks,” he said.
What frightens Korngold is that the valuations accorded to many fintech business models are “just disconnected from reality,” he said. So much money is rushing into the sector that it’s “masking underlying weakness in business models,” he said. Lenders are valued on multiples of what they originate, while insurance firms are valued on their top line growth. He talked about LendingClub and OnDeck, which he said may be great businesses, but might not make great investments.
It may take a few years but the valuations of these high-flying fintechs will come down, he said. These companies will eventually trade on book value and P/E multiples, he said. “At the end of the day, they are still financial services companies,” Korngold said.
Korngold also spoke about the deals he wished he had done. He is credited with Adyen, a payments processor backed by GA that went public last year and saw its value double during its first day, Buyouts said.
General Atlantic, when Korngold was still there, had the chance to invest more into Adyen as a follow-on. GA ended up not putting in more capital. “Adyen ended up becoming GA’s largest gain of all time,” Korngold said. “Gosh, what it could’ve been if we’d put even more capital against it. It would’ve been fabulous.”
Action Item: For more information, contact Korngold by emailing him at Jon.Korngold@blackstone.com