LPs in Blackstone’s record-breaking flagship fund have a fee holiday

Blackstone Group raised the largest private equity fund ever last year, closing its eighth flagship pool on $26 billion. (This is excluding Softbank’s $100 billion Vision Fund, which sort of does private equity but also venture and growth.)

The fund has not yet started investing, as Blackstone polishes off one or two more exits out of Fund VII, Michael Chae, Blackstone’s chief financial officer, said during the firm’s full-year earnings call.

Even when it activates in the next few quarters, limited partners in the pool will get a break from fees for a while. Fund VIII has a four-month fee holiday, Chae said. Chae said the fee holiday starts after the fund is activated.

Fee holidays are one economic incentive large firms like Blackstone can afford to offer to LPs. The firm included a six-month fee holiday for early investors in its seventh fund, which closed on $18 billion in 2015.

The fee holiday helps ease the J-curve effect on the fund for LPs. The J-curve is a period of losses early in a fund’s life when money is being spent, fees are being paid, but returns are not yet materializing as investments mature.

Other incentives firms have used over the years include fee breaks for investors who commit to a fund before the first close, or even access to co-investments to early investors.

Blackstone reported $134 billion in capital inflows in 2019 and deployed $63 billion, the firm reported Jan. 30. Blackstone ended the year with $571 billion of assets under management, up 21 percent year-over-year.

Of total inflows, the firm raised $56.8 billion for full-year 2019, which includes private equity, tactical opportunities, secondaries and infrastructure, the report said. The firm deployed $26.6 billion in private equity last year, and made $13.5 billion in realizations, the report said.

Action Item: Read the full-year earnings report here: https://bit.ly/2RMlgvt