Blackstone racks up $5.6bn for more deals in ‘underpenetrated’ GP stakes space

Blackstone has raised $5.6 billion for a second GP stakes fund to continue placing bets in a market with “running room as far as the eye can see,” strategy head Mustafa Siddiqui told Buyouts.

Blackstone Strategic Capital Holdings II held a final close in early November, Siddiqui and Michael Nash, chairman of Blackstone GP Stakes, said. It finished 40 percent above an initial target of $4 billion, reported last year by Buyouts.

Fund II is 70 percent larger than Blackstone’s inaugural GP stakes vehicle, which closed in 2014 at $3.3 billion.

Blackstone GP Stakes, part of Blackstone Alternative Asset Management, met robust demand for the fund among limited partners, who have grown comfortable with the young but maturing market, Siddiqui said. “Here’s a strategy where you can capture a cash yield and where there is appreciation potential as well.”

Nash agreed, noting these benefits are made possible by “the duration of what we provide.” This is perhaps indicated in the performance to date of Funds I and II, which as of September were generating a combined net return of 18 percent, according to Blackstone.

GP stakes funds, which acquire minority interests in private equity firms in exchange for a share in income, have emerged strongly in the past five to seven years. Blackstone GP Stakes, along with Blue Owl Capital and Goldman Sachs’ Petershill Partners, dominate, accounting for most of the capital raised and deals done.

Intensive dealmaking of late has prompted concern about the space becoming saturated, with fewer and fewer quality candidates available for minority investment.

Siddiqui rejects this view. “This is a really underpenetrated market,” he said. “There are thousands of private equity and other alternative asset managers out there. Firms pop up that I’ve never seen before.”

In addition to incumbent PE brands, Siddiqui said, fresh targets include emerging managers appearing with “increasingly large entry sizes.” Such first-timers are “squarely within scope.”

Blackstone GP Stakes operates with “a wide angle,” Siddiqui said, taking in large and mid-cap players across a range of asset classes, strategies and geographies. The overriding criterion for partners is that they be “best-in-class firms with hungry teams and depth of leadership.”

Blackstone value-added

PE firms sell pieces of themselves to GP stakes funds to bolster their balance sheets and finance priorities, such as general partner commitments to new offerings and growth initiatives. They also gain a hands-off partner with a long investment horizon.

Blackstone GP Stakes brings to the process unique value-adding capabilities drawn in part from its giant parent organization, Siddiqui and Nash said.

“We’re sitting inside the biggest private equity firm on the planet,” Siddiqui said. This provides substantial internal resources and know-how of use to managers in the portfolio for everything from new product and strategy development to back-office, cybersecurity and ESG.

A key benefit is cost savings obtainable through the buying power of a global procurement platform, Nash said. In this way and others, Blackstone “by virtue of its scale” sets the GP stakes strategy apart from competitors.

Fund II, which will make 10 to 15 investments, is already more than half committed. It kept a steady pace in 2021, with minority interests acquired in Great Hill Partners, GTCR and Sentinel Capital Partners. In its third-quarter earnings, Blackstone said it expected $1.5 billion-plus would be deployed to these deals.

This year’s activity bumps ups North American, European and Asian firms in the portfolio to 16. Prior investments include BC Partners, Francisco Partners, GI Partners, Kohlberg & Company, Leonard Green & Partners, Marlin Equity Partners, New Mountain Capital, PAG and Rockpoint Group.

Fund II is now working an “active deal pipeline,” Nash said, with a thematic focus on high-growth and underserved areas.

Siddiqui and Nash oversee a team of about 30 professionals. This includes a strategic support group, which interacts with Blackstone domain and functional experts to assist the portfolio.

Siddiqui, a 12-year Blackstone veteran, was tapped in 2020 as co-head of Blackstone GP Stakes and this year became its sole top executive. He was previously a senior managing director in the private equity group. Before 2009, he held roles with Springbok Capital and General Atlantic.

Nash was appointed the strategy’s chairman in March. He has been with firm for 14 years, holding senior positions across the real estate platform, including chairman of Blackstone Real Estate Debt Strategies. From 1997 to 2007, he was with Merrill Lynch.