Finding the Right Exposure with Private Markets
Many investors would like nothing better than to just move on. But if you’ve been in the markets as long as I have, you know that you can’t squander an opportunity to learn, especially in a year as peculiar as 2022.
As we know, policy stimulus around the world, coupled with restrictions on travel and entertainment and a shift to work from home, led to higher savings and pent-up demand, at the same time that supply chains were stressed. Spending on goods and services ultimately led to inflation, including wage inflation. Looking across Blackstone’s portfolio of companies and properties allowed the firm to identify these trends early. Blackstone was able to position its investing, capital structures and plans for such an environment.
In the US, the federal funds rate rose from basically zero at the start of 2022 to 4.5% for the year, the largest increase in 50 years.1 Equity markets sold off sharply, with the S&P down 18% for the year, the NASDAQ down 33% and the public REIT index down 25%.2 The intra-year movements were even more extreme, with these indices down 26% to 37% at their lows.3 In credit, the high-yield and investment-grade indices declined 11% and 13% in 2022 respectively, and the 60/40 portfolio of stocks and bonds had one of its worst years on record.4
Against this unfavorable backdrop, Blackstone distinguished itself by preserving its clients’ capital. In a year in which the typical investor lost somewhere between 15% to 25% of their money, many Blackstone investors had a highly differentiated outcome.5
We know firsthand the challenges that market cycles present. What you invest in and what you avoid matter equally. How you manage assets once you own them matters, too. Blackstone has performed well in its investing acumen and focus on value creation for nearly four decades.
We believe the year’s events underscore the already evident need to build portfolios that incorporate private market investments.
Today, many investors are in a holding pattern.6 What they’re “holding” is cash. As the calendar year turned, investors held an all-time record amount in money-market mutual funds, according to the Investment Company Institute.6 While this reflects today’s climate of indecision and uncertainty, we believe efforts to wait out the market are necessarily short-lived.
There is nothing magical about the first weeks of the calendar year, but it tends to be the time of year when many review their portfolios and revisit asset allocations. We believe there is no time like the present to carry out a well-designed, purposeful asset allocation.
Asset classes such as private real estate, private credit, and private equity have long been successfully deployed by institutional investors. But they are not just for institutions. Individual investors can and increasingly do deploy these assets in their investment approach.7 The low correlation of private markets to their public counterparts tends to stand out during challenging years like 2022, which is one reason we expect the trend of individual investors following institutions into these markets to accelerate.
This trend of broader adoption of private market investments is still in relatively early stages. But we think it will play an increasingly prominent role in the future of investing on Main Street. Private market investments require a purposeful, deliberate long-term investment strategy, which is what we believe most investors need as they emerge from the holding pattern of 2022.
Working with the right manager in private markets can be key. In our view, investors should look for scale, firepower, and a long track record. Thoughtful manager selection can be the decisive factor in ensuring that the client experience is the one you intend it to be.
Blackstone entered 2023 in an enviable position of strength, extending its long history of outperformance and capital protection in a difficult year across markets. The firm stands ready with ample dry powder to capitalize on opportunities as they emerge. Assets under management rose to a record $975 billion (as of December 31, 2022), and our flagship private real estate and credit strategies continued to deliver for investors.
Accessing Private Markets with Blackstone
We are grateful for the trust and confidence of our clients. We are here to work with you, providing institutional-quality investment solutions, education, and an enduring partnership. We look forward to engaging with you in the year ahead.
Global Head of Private Wealth Solutions
Past performance is not indicative of future results. There can be no assurance that any Blackstone fund or investment will achieve its objectives or avoid substantial losses.
- Bloomberg, as of December 31, 2022. Analysis is based on calendar year.
- Morningstar, as of December 31, 2022. Public REITs are represented by the MSCI US REIT Index.
- Bloomberg, as of December 31, 2022. The following indices were used: MSCI US REIT Index, NASDAQ Composite, and the S&P 500.
- Morningstar, as of December 31, 2022. High Yield is represented by the Bloomberg US Corporate High Yield Bond Index. Investment Grade is represented by the Bloomberg US Aggregate Bond Index. As commonly used in the industry, the 60/40 portfolio is 60% allocated to the S&P 500 index and 40% is allocated to the Bloomberg US Aggregate Bond Index.
- Morningstar, as of December 31, 2022. This is based on the 60/40 portfolio 2022 return (-16%) and Blackstone estimates. The “typical investor” is defined as an individual that invests in the 60/40 stock-bond portfolio. As commonly used in the industry, the 60/40 portfolio is 60% allocated to the S&P 500 index and 40% is allocated to the Bloomberg US Aggregate Bond Index.
- ICI Weekly Money Market Mutual Fund Assets, January 12, 2023.
- See, for instance, “Wealthy Investors Pile into Private Equity to Escape Stock Volatility,” Wall Street Journal, May 26, 2022.
Index Definitions
The volatility and risk profile of the indices presented is likely to be materially different from that of a Fund. In addition, the indices employ different investment guidelines and criteria than a Fund and do not employ leverage; as a result, the holdings in a Fund and the liquidity of such holdings may differ significantly from the securities that comprise the indices. The indices are not subject to fees or expenses and it may not be possible to invest in the indices. The performance of the indices has not been selected to represent an appropriate benchmark to compare to a Fund’s performance, but rather is disclosed to allow for comparison of a Fund’s performance to that of well-known and widely recognized indices. A summary of the investment guidelines for the indices presented are available upon request. In the case of equity indices, performance of the indices reflects the reinvestment of dividends.
Bloomberg U.S. Aggregate Bond Index: The Bloomberg U.S. Aggregate Bond Index is an index of U.S. dollar-denominated, investment-grade U.S. corporate, government, and mortgage-backed securities.
Bloomberg U.S. Corporate High Yield Bond Index: The Bloomberg U.S. Corporate High Yield Bond Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market.
Morningstar LSTA US Leveraged Loan Index: The Morningstar LSTA US Leveraged Loan Index is a benchmark of the US leveraged loan market.
MSCI U.S. REIT Index: The MSCI U.S. REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities. It represents about 99% of the U.S. REIT universe. The index is calculated with dividends reinvested on a daily basis.
NASDAQ Composite: The index measures the performance of all domestic and international based common type stocks listed on the NASDAQ Stock Market. It includes common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. The index is market capitalization-weighted.
S&P 500 Index: The index measures the performance of 500 widely held stocks in US equity market. Standard and Poor’s chooses member companies for the index based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility, and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied. It is market capitalization-weighted.
Important Disclosure Information
All information is as of December 31, 2022 (the “Reporting Date”), unless otherwise indicated and may change materially in the future. Capitalized terms used herein but not otherwise defined have the meanings set forth in the Offering Documents. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon the merits of the investments described herein and any representation to the contrary is an offense.
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Russian Invasion of Ukraine. On February 24, 2022, Russian troops began a full-scale invasion of Ukraine and, as of the date of this Material, the countries remain in active armed conflict. Around the same time, the United States, the United Kingdom, the European Union, and several other nations announced a broad array of new or expanded sanctions, export controls, and other measures against Russia, Russia-backed separatist regions in Ukraine, and certain banks, companies, government officials, and other individuals in Russia and Belarus as well as a number of Russian individuals. The ongoing conflict and the rapidly evolving measures in response could be expected to have a negative impact on the economy and business activity globally (including in the countries in which the Fund invests), and therefore could adversely affect the performance of the Fund’s investments. The severity and duration of the conflict and its impact on global economic and market conditions are impossible to predict, and as a result, could present material uncertainty and risk with respect to the Fund and the performance of its investments and operations, and the ability of the Fund to achieve its investment objectives. Similar risks will exist to the extent that any portfolio entities, service providers, vendors or certain other parties have material operations or assets in Russia, Ukraine, Belarus, or the immediate surrounding areas.
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Trends. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.
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