Independent Thinking^®

Q&A with Blackstone’s Joan Solotar

Editor’s note: Evercore Wealth Management supplements its core investment capabilities with carefully selected outside funds across the range of the firm’s asset classes. Here we interview Joan Solotar, Head of Private Wealth Solutions and Chair of the Blackstone Total Alternatives Solution’s Investment Committee, on the role of illiquid investments in private client portfolios. Please note that this represents the views of Blackstone and not necessarily the views of Evercore Wealth Management.
 
Q: Blackstone describes allocations to illiquid investments as “patient capital.” Please explain.
 
A: A private market fund typically has a three- to six-year investment period. This provides the investment team with the flexibility to wait for the best investment opportunities, in contrast to most liquid funds, which can allocate capital immediately but must be 100% invested at all times. Similarly, the timing of sales can be better optimized in private market investing. In short, it requires patience to identify and source the right deals, improve the underlying investment and successfully liquidate through either the public markets or a direct sale. Long-term investors may be rewarded in the form of outperformance for their willingness to invest in less liquid holdings.
 
Q: Are there advantages in illiquidity itself? How about in inefficient markets?
 
A: For nontraditional assets beyond long-only equities, estimates of the illiquidity premium can range from 300 basis points per annum and higher, depending on the asset. Generally speaking, funds with longer lockups, which enable managers to invest in less liquid holdings, tend to earn higher returns than those without.
 
While greater illiquidity may increase the inefficiency of a particular market, it does not by itself guarantee higher returns. Instead, it shifts the primary source of the return from the beta, or movements of the market itself, to the individual manager’s skill in managing the investment to a more successful outcome.
 
Q: Private investors tend to be under-allocated to illiquid assets relative to institutions such as pensions or endowments. Why is that?
 
A: Many institutions with long investment horizons and known funding requirements have increased their allocations to illiquid alternatives to well over 20% on average today.¹ These institutional allocations to private market alternatives far exceed most individual investor allocations, which typically represent about 5% of their portfolios.²
 
The structural realities of illiquid investments create a number of challenges that may constrain the appetite of individual investors for these assets. Several challenges include gaining exposure, achieving a diversified allocation, and maintaining an allocation.
 
Gaining Exposure: Unlike the public markets, private market investors cannot gain instantaneous exposure to their underlying investments: Time is required to identify private market opportunities and to conduct due diligence negotiations.
 
Achieving a Diversified Allocation: Fund offerings are calendar-dependent, may not be accessible to all investors, and often require higher investment minimums. Individual investors seeking broad diversification in the space – across assets, strategies, managers, and “vintage years” – may have difficulty achieving that kind of exposure.
 
Maintaining the Allocation: Capital is deployed as investments are identified over time and is returned back to investors as the investments are realized. This means only a portion of an investor’s commitment is at work at any point in time.
 
Q: How should private investors deploy their own patient capital across the private market space? How should they think about “private” asset allocation?
 
A: Private equity, real estate and distressed debt may be best understood not as new asset classes but as less liquid versions of existing strategies.
 
Private equity sits alongside other more liquid equity-like exposures, such as long/short equity, active long-only, and passive equity structures. They are all equity-oriented assets; the longer-term nature of private market vehicles being just one distinguishing characteristic. The same can be said for allocations to fixed income, which would extend from the most liquid Treasury or bond ETF portfolio, into less liquid high-yield or senior loans, and then direct lending, mezzanine and distressed debt as the least liquid.
 
In other words, private market allocations may be best understood as a natural extension of the public or liquid portfolio, with related risk and return characteristics all derived from the overarching asset class to which each belongs.
 
Q: Where does Blackstone see opportunities today?
 
A: By leveraging our scale and brand, we are able to find investments throughout market cycles across asset classes. Our investment platforms seek to be more than just a source of capital and seek to create value through operational intervention and proactive asset management.
 
Currently, we see particularly interesting opportunities in the following trends and investment themes:
 
Within private equity, we are focused on large-scale, primary buyouts across key sectors such as business services, fintech/financial services, healthcare, midstream energy and industrials, with a discipline around underwriting for attractive unleveraged returns. In the current environment characterized by historically low cost of capital, Blackstone is focused on transactions where execution complexity narrows down the partner of choice to Blackstone, and where Blackstone can bring operating intervention. Due to faster economic growth and favorable deployment trends in Asia relative to the rest of the world, we see Asia as an attractive region of focus to source investments.
 
Within real estate, we seek to capitalize on investment opportunities driven by several secular trends. We see increasing demand for logistics due to the shift to e-commerce and the need to be closer to customers, and we focus on growth areas such as innovation cities and IT hubs. We focus on sectors with growth potential and seek assets where we can buy at good values and create value through proactive asset management.
 
Within credit, we continue to find opportunities, particularly in Europe where the risk/reward is favorable. Some prominent investment themes include cyclical industries (i.e., energy), fallen angels from investment grade, event-driven opportunities in larger capital structures, and industries under transformation such as retail, healthcare and telecom. In all of its transactions, Blackstone remains focused on the senior part of the capital structure, and is patient and cautious in the deployment of capital.
 
Last, the tactical opportunities team continues to leverage its unconstrained mandate to find opportunities across asset classes, sectors and regions. Currently, we see significant opportunities in structured transactions that are designed to provide downside protection with potential upside participation. The team is investing in key sectors, including telecom infrastructure, Cloud computing and cybersecurity.
 
Given Blackstone’s expertise, investment discipline and global platform, we believe the firm is positioned to capitalize on market disruptions and successfully navigate the evolving environment going forward.
 
For further information about Blackstone and about other funds on the Evercore Wealth Management investment platform, please contact Stephanie Hackett at [email protected].
 

¹ Source: Global Pension Asset Study 2018, Willis Towers Watson; National Association of College and University Business Officers 2017 Study (Dollar-weighted Average).
¹ Money Management Institute, “Retail Distribution of Alternative Investments”, 2018.