Breakingviews - Buyout barons risk too much of a good thing
Collectively, the alternative-asset foursome reported $4.2 billion in fees for managing money in the second quarter. Blackstone's roughly $1.9 billion haul increased, opens new tab 4% from the previous three months, the best sequential gain since 2022. KKR, opens new tab and Apollo, opens new tab similarly turned in their best showings in a few years, while Caryle on Wednesday capped it off, opens new tab with a 12% uplift.
They're also returning more money to investors. On a trailing 12-month basis, Blackstone notched nearly $100 billion of sales, more than 40% higher than in the preceding year-long period. Carlyle boss Harvey Schwartz crowed about returning $15 billion to its fund backers, saying it triples the industry average.
Even as trillions of dollars in investments remain stuck, buyout shops are rolling out everything from exchange-traded funds that blend public and private to evergreen structures with no set end date. Some firms pitch the odd combo as a chance for new retail investors to get in now with gaudy 2021 valuations sliding. Apollo boss Marc Rowan warns, however, that he doesn't see 'trying to shoot the lights out for highly levered' LBOs to be the right strategy for individuals.
Yet private equity will need assets to satisfy growing demand. The same goes for credit, where Apollo and its ilk consider themselves uniquely able to extend safe, high-yielding loans. Rowan and Blackstone President Jon Gray both say their firms are printing investment-grade IOUs that charge 190 basis points more over a benchmark compared to more easily tradeable loans.
Sustaining that sort of alpha may be tough. Credit spreads generally are collapsing. In July, A-rated tranches of bundled corporate debt known as collateralized loan obligations yielded only 1.6 percentage points above their reference guide, according to Nomura analysts. In 2021, it was 2.2 percentage points.
Apollo, Blackstone, Carlyle and KKR try to stay ahead by making loans others can't or won't. Rowan's shop owns, for instance, an aircraft lending business. All of them are rushing into trends shaped by artificial intelligence, where customers borrow against chips and such. With more and more money to deploy, the risk increasingly will be in generating outsized returns.
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