RBC Capital Markets analyst Bulent Ozcan highlights key takeaways from The Blackstone Group L.P. (NYSE:BX)’s 2014 investment themes call.
Joe Baratta, Global Head of Private Equity at Blackstone, hosted a conference call today to speak about the firm’s outlook for 2014 and beyond.
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As we had written in our own Outlook note, doing deals has become more difficult compared to a few years ago. Private equity firms need to be more creative when structuring deals as entry multiples have increased significantly.The average LBO valuation multiple was 10.2x in 2013. This makes generating target returns more difficult relying on multiple expansion.
Blackstone does not reply on leverage to generate returns
Large private equity firms such as The Blackstone Group L.P. (NYSE:BX) are acting increasingly like strategic buyers, as opposed to financial buyers. Blackstone made it clear that it does not rely on leverage to generate target returns. And with entry multiples having increased, the value creation cycle is becoming increasingly important. One lever larger private equity firms can pull – given the large number of portfolio companies they own – is to combine portfolio companies in order to improve operational efficiency and to take advantage of revenue opportunities by broadening product offerings. This, in turn, allows larger PE firms with a global footprint to pursue deals they might not have otherwise.
Blackstone made it clear that it does not rely on investment banking relationships to drive deal flow. It sources its own deals across sectors and geographies.
The Blackstone Group L.P. (NYSE:BX)’s objective remains to invest in deals that generate on average a Multiple of Invested Capital of 2.5x. It finds these investment opportunities in sectors and regions where capital requirements exceed capital supply, such as power & energy and consumer finance.
Joe Baratta announced that the pipeline remains strong and that the firm is continuing to look at large deals. The firm’s goal is to invest about $3.0B to $3.5B in 2014, with about 2/3 to 3/4 of capital deployment taking place in the US. As for European deals, Blackstone does not see much of an opportunity to put money to work in private equity, given valuations and expectations of lower GDP growth.
The Blackstone Group L.P. (NYSE:BX) does not deal volumes to return to 2006 and 2007 levels. And it does count on corporate M&A to pick up in 2014, allowing investments in corporate carve outs.
In terms of realizations, Joe Baratta made clear that The Blackstone Group L.P. (NYSE:BX) is well positioned to sell down assets in 2014. However, investors should not expect the same sort of volume we have witnessed in 2013. However, investors should expect to see large scale exits over the coming 4 years.
Overall, we would describe to tone as positive. While there are challenges, there is money to be made as long as alternative asset managers remain nimble and innovative.