Blackstone’s Gray sees potential widening secondary discounts on LP portfolios

Jonathan Gray’s contention, that discounts on LP portfolios could increase, runs contrary to the trend this year of strengthening pricing.

Blackstone is set to take advantage of what could be a strong secondaries opportunity as discounts on LP portfolios are poised to widen, according to the firm’s president Jonathan Gray on the third quarter earnings call.

“Having a $20-plus billion fund is obviously well timed…in terms of transaction activity, the pipeline is starting to build; it will be more LP-driven because distributions have slowed and in many cases there’s a denominator effect and [LPs are] thinking about ways to open up capacity to commit to new funds,” Gray said.

“We think that will lead to more transaction activity. I would say we’ve been patient because we think it’s possible that discounts could widen again and that would be a better timing in terms of entry point. We think the environment should be favorable…just given the relatively limited amount of capital against what we think is a scale opportunity. We think that business will pick up in activity over time, it may take a little bit as sellers re-adjust their expectations.”

Blackstone’s Strategic Partners unit closed its latest flagship pool, Fund IX, on $22.2 billion, along with its debut GP-led-focused fund on $2.7 billion, in January. The firm earlier this year stepped up as a co-lead investor along with JPMorgan’s secondary group and Hollyport Capital on a single-asset transaction run by Aterian Investment Management, Buyouts previously reported.

Secondary pricing increased with buyers’ optimism that interest rate increases were coming to an end, but what hasn’t changed, as Gray pointed out, are the dual pressures on LPs causing them to seek secondaries relief: slow distributions from sluggish exit activity and overexposure to the asset class.

These pressures, especially slow distributions, are forcing LPs to consider ways to generate liquidity, including through secondary sales. LP sales have dominated transaction activity this year, and will likely continue to represent the majority of deals in 2024, sources have told Buyouts.

With less buyer capital available relative to supply, however, and growing desire among LPs to ease these pressures, buyers may have more leverage to demand discounts. And LPs, who have contended with slow exit activity for almost two years, will get to the point where they may be willing to accept deeper discounts.

Gray’s contention, that discounts on LP portfolios could increase, runs contrary to the trend this year of strengthening pricing.

Average pricing for LP transactions across all strategies was 84 percent of NAV, increasing from the lows of 2022, according to Jefferies first-half secondaries volume report. Pricing on buyouts rose to 90 percent of NAV, with relatively strong underlying performance and an increase in comparable public company multiples, the report said.

“Pricing for LP portfolios steadily improved throughout H1 2023 as public markets gained steam and aggressive portfolio bidders seeking diversification re-emerged,” the survey report said.