Blackstone’s Martin Brand weighs in on high-quality assets, generative AI and recession resistance

Good morning, Hubsters. MK Flynn here with today’s Wire.

As the summer winds down, it’s a good moment to reflect on dealmaking trends.

PE Hub and PE Hub Europe have been asking private equity thought leaders for their perspectives on dealflow in the second half of 2023 for our ongoing series of Q&As.

Today, 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.

We’ll also take a look at recent interviews with Beatrice Mitchell, the co-founder and managing director of Sperry, Mitchell & Company, and with Zak Ewen, partner at Battery Ventures.

H2 Outlook
Let’s start with the Blackstone perspective.

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.

Here’s an excerpt from my interview with Martin Brand, who serves as head of North America private equity and global co-head of technology investing for Blackstone.

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 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 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.

Ready to move on
For another perspective on dealmaking in the second half of the year, I turned to Beatrice Mitchell, the co-founder and managing director of Sperry, Mitchell & Company.

In my recent Q&A with Mitchell, she reported that while dealflow for bigger deals has slowed down this year, life in the lower-mid-market has been fast-paced.

Here’s an excerpt from that interview:

Deals in the lower middle market more likely involve sales of private companies than sales by PE sponsors or corporate divestitures. As I mentioned previously, owners of private companies often have considerations beyond the state of the economy when deciding when to sell. Personal considerations (like a desire to retire, or disagreements amongst partners or family members) often are the determining factor. Because of this, lower middle market M&A activity is always more consistent and stable than the larger deal M&A markets. There always seems to be a steady stream of private company sellers.

Besides, we have always found that there is a great appetite for well-performing businesses with defendable market niches, irrespective of the external markets or economic outlook.
I would also add that managing through the vicissitudes and challenges of covid changed the outlook for many private company owners. Once their companies recovered and began to gain momentum, many of these owners have shortened their timelines to selling.

Frankly, covid took the wind out of their sails and the fun out of running their businesses. They are ready to move on.

Demand for tech
International demand for European tech firms will help drive activity in the second half of the year, Zak Ewen, partner at Battery Ventures, told affiliate PE Hub Europe’s Nina Lindholm. Ewen said the trends that underpin tech investments are still solid in Europe and the US.

Here’s a snippet from that interview:

GDP growth is low, and this means that the end markets that tech companies sell to are still down. The cost of debt is increasing, and this will continue in H2. However, in Europe, there is a robust, healthy mid-market tech ecosystem. Many American funds have opened offices in Europe in H1. There is appetite internationally for technology businesses in Europe and a big sample set to pull from, which will help drive activity in H2. This means there’s competition. There are multiple interesting intersections of a company throughout its development cycle and Battery can get involved at any of those intersections.

Europe is very fragmented. Naturally the tech ecosystem in Europe is equally as fragmented. In most end markets, especially software, the US will be 5-10 times the size of the same market in France or Germany, for example. There we tend to start with one business whereas in Europe, we think creatively around situations and consolidation. We expect to see more interesting deal structures in this region.

We’ll have more H2 Outlook Q&As in the weeks to come. If you’ve got thoughts to share, email me at mk.flynn@pei.group.

That’s a wrap for today. Craig McGlashan will bring you tomorrow’s Wire, and Chris Witkowsky is on deck for Wednesday. I’ll be taking a few days off, so Rafael Canton will bring you Thursday’s Wire, and Obey Martin Manayiti will write the Wire on Friday and Monday.

Happy dealmaking,

MK