Illustration by II
The roster of visitors at Blackstone’s midtown Manhattan headquarters is fast changing. Executives from deep-pocketed institutions — like a California public employees’ pension fund or an oil-and-gas–rich emirate’s sovereign wealth fund — continue to show up, ready to pour billions of dollars into Blackstone businesses, often as limited partners.
But far more numerous in recent years are less affluent financial advisers from places like Kansas, Oregon, and South Carolina, where they service clients trying to balance house payments and college tuitions for their kids.
In its four-decade history, private equity has undergone three stages. There were the barbarian corporate buyouts of the 1980s. Then came the boom in alternatives, funded by large institutions and ultra-high-net-worth investors. And starting now is the retail revolution.
Led by Blackstone, alternative-asset managers are assaulting the last and richest bastion of fundraising: relatively plain folks with $1 million to $5 million in investable assets.
It is not only financial products being tailored to this humbler clientele, but sales methods as well.
Whereas meetings with pension and sovereign wealth fund managers are carried out face-to-face, alt firms must reach out to the many more thousands of retail investors through webinars and other virtual gatherings. Squads of retail specialists then follow up with visits to clients around the globe.
Blackstone has even created what it grandiloquently calls Blackstone University to educate the retail crowd on the merits of alternative products in real estate and private credit.
The fundraising and merchandising of alts aimed at individuals with less than $5 million in liquid assets are growing so quickly that Blackstone may well become a retail investor–dominant firm over the next decade. That will accelerate the growth of perpetual capital and fee-related earnings at the firm.
At stake is an $80 trillion market of individual investors. “And today less than 5 percent is invested in alternative products,” notes Joan Solotar, Blackstone’s head of private wealth solutions.
But to raise that percentage dramatically, Blackstone and its rivals will have to get past the retail investors’ gatekeepers: financial advisers like Lawrence Glazer.
“We don’t just want to buy products,” says Glazer, co-founder and managing partner of Mayflower Advisors, a Boston-based registered investment adviser of about 40 employees catering mostly to clients with less than $5 million in liquid assets. “We want a partner to help our clients figure out how and when to use these products and what to be concerned about. And we want multiple vendors to offer a wide choice to our clients.”
Until recently, those demands would have been dismissed as pure chutzpah. Alt products were the almost exclusive domain of institutions and family offices that could afford the megamillion-dollar investment requirements.
“That’s where the big checks are,” says Steven Kaplan, a private equity specialist at the University of Chicago Booth School of Business. “Retail investors were saved for last because they are more expensive to go after.”
Private equity firms must also contend with regulatory requirements that still limit accredited investors in alternative products to those with at least $1 million in investable income.
But the appetite for alts among the wealthy elite is nearing a limit as portfolios become bloated with nonliquid assets. Alternative investments already account for as much as a third of institutional portfolios. And market volatility is pushing that figure even higher.
“Their equity holdings could decline so much that their alt portfolios would have a disproportionate overall allocation,” explains Matt Brown, chief executive of CAIS, an internet platform that gives independent financial advisers access to alternative investment products.
So fundraising campaigns have recently tilted toward more-modest investors. Blackstone and its competitors insist there are also egalitarian considerations: Why shouldn’t single-digit millionaires, or even 401(k) holders, get access to private real estate and credit funds that have delivered high returns to institutions for decades?
Alt-asset managers further point out that their products tend to perform better than stocks and bonds in volatile markets and in inflationary environments like the current one. Also, because the vast majority of companies aren’t publicly listed, the only way for retail investors to access a broader market is through alt products.
These arguments are gaining converts among regulators that have long worried that retail investors might lose their shirts and skirts if a recession leaves them insolvent with nonliquid alt products.
Blackstone created a unit, which eventually became known as private wealth solutions, to raise and invest capital from individuals with at least $1 million in investable assets. But Schwarzman, well known for his abhorrence of deficits, balked when the unit’s start-up costs showed a first-year loss of $10 million — though that was chump change for his megabillion-dollar firm. “Does it have to cost us this much?” he asked his senior executives. Yes, he was told. “So it was the first time I ever voluntarily agreed to lose money,” he says.
The losses didn’t last long. Over the past four years, the retail channel has quadrupled its assets under management, to $233 billion — or a quarter of Blackstone’s total AUM. “And we have a long runway ahead,” says Solotar, who has overseen most of this growth with a staff that now numbers close to 300 people.
According to Jonathan Gray, president and COO, the retail channel has benefited from the same strategies applied elsewhere at Blackstone for institutional clients: Funnel investments into a few, fast-growing business sectors; become a first mover in those sectors; and leverage Blackstone’s huge scale to discourage rival bidders.
Thus far, Blackstone has launched three retail-linked alt products: BREIT, a nontradable real estate investment trust; BCRED, a private credit fund; and a private credit fund for Europeans.
Powered by these products, the firm has sprinted far ahead of competitors such as Brookfield Asset Management, Apollo Global Management, and Ares Management Corp. in retail fundraising.
“We are many multiples larger than our nearest competitor in this space,” says Gray.
Blackstone began its move into the retail channel by wooing UHNW individuals with investable incomes above $5 million. This segment is best approached through the large banks, brokerage firms, and family offices that handle their portfolios.
As a first mover in the retail space — and with a track record and strong brand recognition — Blackstone easily persuaded major distributors like Morgan Stanley and Merrill Lynch to offer Blackstone alt products to their UHNW clientele. “We have terrific access with these firms because we have proven over time that we are adding value to their business,” notes Solotar.
Blackstone is pushing on an open door with the likes of JPMorgan Chase and UBS wealth managers. Their UHNW clients can easily risk setting aside a million dollars for nonliquid alt products in their $5 million IRAs.
“They’re never going to say, ‘Hey, I’ve got to liquidate my IRA.’ There’s just no scenario for that,” says a large-bank financial adviser who manages more than a billion dollars for his clients.
But that’s not the case for smaller, independent financial advisers with only a few UHNW and HNW clients. Because alternatives are a small part of their business, they may not be worth the additional workload.
The extra effort includes having to file a K-1 tax form instead of the usual 1099. Above all, it means producing the time-consuming documentation needed to move retail investors into alt products instead of just placing digital orders for exchange-traded funds and mutual funds.
“The moment you start to move from electronic to filling out a form, you instantly increase the hassle factor,” says Brown, whose firm, CAIS, digitizes documentation of alternative investments for independent financial advisers.
Despite the hassle, Blackstone has moved beyond UHNW clients and waded into the deeper pool of HNW investors.
That means satisfying experienced, cautious financial advisers like Mayflower’s Glazer. In his quarter-century as a wealth manager, Glazer has accompanied the migration of retail money from public equity and fixed-income mutual funds to ETFs and index funds and, most recently, to alternatives.
He was at first leery of the larger platforms, like Morgan Stanley and UBS, because they treated alternatives in a proprietary way — manufacturing alt products and distributing them exclusively.
“As an independent adviser, we don’t want to limit our clients to any one product or platform,” says Glazer. “We like an open-architecture approach.”
So Mayflower picks and chooses among products offered by large private equity firms like Blackstone, global banks, big brokerages, and internet platforms such as CAIS and iCapital.
Glazer also has to address a host of doubts about liquidity, transparency, and portability of alt products. He explains to clients that there are trade-offs between a product’s performance and its liquidity. “They may not have full access to their funds to buy a home or send their kids to college,” he says.
Depending on a client’s total investable capital, age, risk appetite, and liquidity needs over the next year, Glazer will recommend that alts take up anywhere from 2 to 30 percent of a portfolio. He emphasizes that alts are a complement to, not a replacement for, stocks and bonds.
Among other client questions that come up repeatedly, Glazer lists: If I leave the adviser, can I take the product with me? And if advisers leave the firm, can they take the products with them?
Glazer concedes he doesn’t have all the answers. “No adviser can be an expert on all things in the alternative space,” he says. “That’s why we look for partners to help our clients figure out how these products fit into their overall investment strategy.”
Financial advisers from across the country are hosted at Blackstone’s headquarters for a day and a half, with BXU lectures during the day, then dinner followed by a speaker like Schwarzman or Gray.
Sample lectures include “Real Estate: Discovering Opportunities in an Inflationary Environment,” delivered by Frank Cohen, chairman and CEO of BREIT; and “How Private Credit Plays a Role in Today’s Macroeconomic Environment,” with Brad Marshall, CEO of BCRED.
Glazer’s Mayflower team members are among the 11,000 Blackstone University grads.
Financial advisers can brush up by going online for BXU webinars, which combine updates on alternatives with glowing accounts of Blackstone’s ever-expanding investments.
“We also have an army of people around the world meeting with advisers one-on-one in their home offices,” Solotar adds.
Altogether, Blackstone claims to have contacted some 85,000 financial advisers and sold alt products to about 40,000. Though that may sound like a lot, Solotar estimates that 80 percent of financial advisers have never allocated alternatives.
The most frequently acquired Blackstone alt product is BREIT, which promises retail investors access to the same quality real estate assets offered to institutional investors.
Nadeem Meghji, head of Blackstone’s Real Estate Americas, oversees property investments for both institutional and retail investors. But he takes exception to being described as wearing two hats.
“Regardless of the pool of capital that we are investing, we use one team, one process, the same analytical rigor, same due diligence,” Meghji insists.
But there are significant divides. Institutions — pension funds, endowments, sovereign wealth funds, and family offices — prefer big, opportunistic gains from their Blackstone real estate investments. They are willing to keep their money in place and forgo yields until Blackstone squeezes costs from an asset and sells it at an elevated profit four or five years later. This is the buy it/fix it/sell it strategy that made private equity firms famous (or notorious) decades ago.
Retail investors, on the other hand, are focused on immediate yields and concerned about liquidity. To accommodate them, Blackstone launched BREIT in 2017. The real estate investment trust has grown to a net asset value of $68 billion — by far the largest such retail investor vehicle in the private equity world.
Unlike opportunistic funds, BREIT funds can run in perpetuity, generating constant returns for retail investors and an endless stream of fees for Blackstone. Because risks and expected returns are higher for opportunistic funds, their institutional investors pay a 1.5 percent management fee and a 20 percent performance fee. That compares with the 1.25 percent and 12.5 percent fees that BREIT charges its retail clients, reflecting their lower risks and projected returns.
But retail investors are on their own when it comes to possible additional fees collected by their financial advisers. “We don’t control the fees set by our distributors,” says Solotar.
BREIT also allows its investors to redeem their capital on a monthly basis — within limits, linked to the size of the fund. (Similarly, Blackstone’s other large retail fund — BCRED, a private credit fund focused on senior secured floating-rate loans — allows investors to redeem on a quarterly basis.)
What opportunistic funds and BREIT do share is an investment strategy that pours billions of dollars into a few high-return asset categories where Blackstone’s scale dissuades competitors. Thus a formidable 80 percent of BREIT investments are channeled into rental housing and e-commerce-linked warehouses — two of the most profitable real estate sectors in recent years.
In April, BREIT, along with Blackstone Property Partners, another in-house fund, announced the $13 billion acquisition and privatization of American Campus Communities. With more than 100,000 beds at major universities, ACC is the largest student housing operator in the country. Yet the supply of student beds fell by 50 percent over the past seven years, mainly because rising costs slowed the building of new dormitories, according to Blackstone. That shortage is likely to grow more acute because when the economy slows down, college student enrollment tends to climb.
“So you have a supply shortage, growing enrollment, and then a large-scale situation involving a complex privatization where most other firms can’t compete,” explains Meghji.
There was similar reasoning behind BREIT’s $3 billion acquisition and privatization of WPT Industrial last year. The Toronto-based, publicly listed REIT owned warehouses in major markets across the U.S. And in recent years, Blackstone has become the world’s largest owner of e-commerce-linked warehouses.
“Again, we focus on larger transactions where we can leverage our scale and there is less competition,” says Meghji.
With an astonishing $170 billion in dry powder and an appetite to match, Blackstone has inspired some financial advisers to suggest that their retail clients consider buying shares in probable acquisition targets before investing in BREIT itself. Any publicly listed REIT in which Blackstone already has a minor stake is a likely future acquisition — at the usual 20 to 30 percent premium.
“So you can buy something at whole value, or you can be part of the target getting that immediate 20 to 30 percent gain on your shares,” says Dane Bowler, a Madison, Wisconsin–based financial adviser and a REIT specialist with 2nd Market Capital Advisory Corp. “Either way, you’ll end up in the Blackstone fund.”
Regulation is a major potential limitation on Blackstone and its competitors.
Before dealing with financial advisers and their retail clients, Blackstone has had to overcome the doubts of the Securities and Exchange Commission and other regulators about the propriety of alternative products for low-single-digit millionaires.
“They are smart enough to realize that if they keep the regulators in the loop, they won’t ruffle any feathers when they come out with a new product,” says James Angel, a Georgetown University business professor specializing in the regulation of financial markets. “That’s just the opposite of Big Tech’s attitude, which is to push through a new product and ask forgiveness later.”
An ideal road map toward regulatory approval for Blackstone and other leading private equity firms looks like this: Regulators are offered a narrow set of asset classes to consider along with a few brand-name firms that have already been vetted by big pension funds and other institutional investors.
Blackstone then works closely with lawyers who are thoroughly familiar with all the details around the regulatory framework governing alternative products. “And we operate within that framework when we are designing a product,” says Solotar.
The most recent Blackstone retail alt product up for SEC approval is a fund known as BXPE. It will offer individual investors access to Blackstone’s private equity investments in corporate leveraged buyouts and growth equities, among other businesses.
The SEC allows alternative-asset managers to pitch their products to investors with at least $1 million in liquid assets. But Blackstone would like to see regulators — including the Department of Labor — someday approve alt products for inclusion in 401(k)s as well.
Solotar argues that retired police officers, firefighters, and teachers have long benefited from private market investments by their pension funds — so why not 401(k) holders as well?
“If you’re saving for 20, 30, 40 years, you shouldn’t be limited to liquid stocks and bonds,” she says.
Boosted by retail investor capital, Blackstone is almost certain to end 2022 with a trillion dollars in assets under management. That’s four years ahead of the target date announced by the firm on investor day in September 2018.
Solotar predicts that within a few years, retail investment alone will account for a half-trillion dollars of Blackstone’s AUM. The key is designing alt products for the retail channel beyond real estate, private credit, and private equity to the whole range of Blackstone’s other businesses — insurance, infrastructure, life sciences, entertainment, and technology.
“If you look across Blackstone’s platform, wherever we have leading global franchises with scale, it’s not unreasonable to assume that we will ultimately follow suit with products for a wider audience,” says Solotar.
So how will a retail investor–dominant company differ from today’s Blackstone?
“I don’t see it as fundamentally changing the core of the firm, the investment process, how we deploy capital — all of that will remain the same,” insists COO Gray, who is Schwarzman’s heir apparent.
What will change is the way Blackstone communicates with its investors. Earlier this year, the firm’s traditional private fund meeting gathered some 300 mainly institutional investors in a conference room. By contrast, the most recent BREIT shareholders event drew 5,000 attendees and had to be held as a virtual meeting.
And someday soon, predicts Gray, “there will be a hundred thousand attendees.” Maybe even connected in 3D with augmented-reality headsets?
