PE Hub is asking private equity thought leaders for their perspectives on dealmaking in the second half of 2023 for our ongoing series of Q&As. Here, we’re featuring insights from Martin Brand, who serves as head of North America private equity and global co-head of technology investing for Blackstone.
Always active, Blackstone completed the acquisition of Emerson’s climate technology business, now known as Copeland, for $14 billion in May and the acquisition of Cvent from Vista Equity Partners for $4.6 billion in June. The firm’s Real Estate Income Trust is currently selling Simply Self Storage to Public Storage for $2.2 billion.
What is Blackstone’s forecast for the US economy in H2?
The economy is strong, but the trajectory from here is highly uncertain. Pricing compensates for some volume slowdowns currently. Inflation is increasingly in the rear view mirror, but more progress is needed on labor markets, and we expect the Fed will maintain higher rates for longer. Overall, we anticipate a deceleration of the economy. The good news is that we’re seeing strength on the ground across our portfolio – and we benefit from our focus on high-quality industry leaders in industries supported by long-term, secular mega-trends like the digitization of the economy and the energy transition.
What are you expecting in terms of dealflow in the second half of the year?
I am anticipating a slow pick-up in dealflow, but not going back to the levels we saw in 2021 and the first half of 2022. Some of this slower dealflow is a result of capital scarcity and increased discipline among the private equity industry, something that was not the case for the industry in aggregate in 2021 when volumes increased by over 100 percent vs prior years.
What are the key challenges for dealmakers in 2023, and how is Blackstone meeting them?
There are a number of challenges: higher rates, less debt availability, economic uncertainty. In my view, the market is not fully reflective of those conditions, making it difficult for buyer and seller expectations to intersect.
The challenges also present opportunities. For example, we sourced financing directly for our recent Copeland deal. For our acquisition of Cvent, we used the market dislocation in the SPAC market to source one of the lowest revenue multiple, high growth software deals in recent years.
What are the key opportunities for dealmakers in 2023, and how is Blackstone taking advantage of them?
It’s important to stay disciplined and highly selective in which deals to pursue. Our strategy is to buy only what we believe are the highest quality businesses. We focus on partnering with management teams to drive operational improvements and find opportunities where we can add differentiated value. We are also thematic investors, seeking out sectors that benefit from significant macro shifts, such as the technological transformation of the industrials sector, AI and the rise of marketplaces. Together, this approach positions us well to navigate times of economic uncertainty.
What do Blackstone’s recently closed acquisitions of Copeland and Cvent tell us about the environment for dealmaking in 2023?
Both deals are emblematic of our approach to investing. Copeland is a corporate carveout partnership, which is an area where we’ve been active historically – for instance, our Refinitiv deal with Thomson Reuters or our recent CoreTrust acquisition. Cvent is an example of an investment benefiting from one of our core themes, the recovery of travel and events. We also benefited from synergies and insights from Blackstone’s real estate portfolio.
What kinds of deals can get done today? Are there subsectors or types of companies that are recession-resilient?
Typical recession-resistant sectors historically have been healthcare or consumer staples. We continue to be attracted to market leaders with strong products and high growth. Those companies are typically able to better weather recessionary periods and require less leverage. Software remains an attractive area for long-term growth, and we’ve seen an increase in our pipeline for industrial carveouts. Where you invest matters, and the most resilient sectors trace back to strong foundations that go beyond recent performance data.
What can you tell us about take-private deals and corporate carveouts in this climate?
We remain very focused on creating proprietary opportunities for our investors via carveouts like Copeland, CoreTrust and Refinitiv. We also continue to look for opportunities to initiate take privates where we have a strong thesis and relationship with the management team, as was the case with Cvent.
What’s happening on the bid-ask front? Are sellers getting more realistic?
Unfortunately, the gap between buyer and seller expectations remains, unless the business is really underperforming. The pricing for high-quality assets remains elevated, in particular as the equity market is doing well. However, it is becoming increasingly clear that money is scarcer as a number of processes fail, that will have a moderating effect on prices over time.
What’s going on with valuations?
Valuations remain high, and there continues to be a significant mismatch in terms of buyer and seller expectations.
What are the exit opportunities for private equity-backed companies in 2023?
High-quality assets will find a buyer, whether through a secondary transaction or a corporate exit. They are also likely the first companies to reopen the IPO window. On the flip side, mediocre or poor assets that are less attractive to corporate buyers are more hit and miss, and underlying process failures ultimately make them more vulnerable to market volatility. The differentiation between low-quality and high-quality companies will likely amplify when the 2021 vintage hits the exit window in two years.
What are the opportunities for technology investing in H2? Is Generative AI on your dealmaking radar?
We are looking at tech in a diversified way, not just software, but also financial technology and consumer tech such as digital media. AI continues to be a priority for us, as it has been for years – we have over 50 data scientists, and have been working to integrate data science, machine learning and now generative AI into our decision making. We are rolling out AI initiatives across the portfolio and factoring it into our own processes. I believe AI only amplifies Blackstone’s competitive advantage through our scale. It’s a mega-trend and we’re excited about its potential to redefine private markets.
For another perspective on dealmaking in H2, see PE Hub’s recent Q&A with Beatrice Mitchell, the co-founder and managing director of Sperry, Mitchell & Company.