What do Blackstone Group’s results mean for the wider private equity landscape? The fund posted its largest quarterly profit to date at $1.75 billion on yesterday’s earnings call. A focus on travel, sustainability, and an apparent discernment in when to deploy capital could point the way forward.

Stephen Schwarzman

First up, the fund’s reticence to deploy sizeable funds may pour a bit of cold water on the prospects of large LBOs in the immediate future. Toshiba Corp.’s reported takeover interest from KKR, Bain Capital, and Brookfield Asset Management, alongside a confirmed indicative proposal from CVC Capital, left market watchers wondering if the potential $21 billion price tag is a sign of deals to come. 

Blackstone certainly has the firepower to ink major transactions. Like many funds, it cleared analyst expectations for fundraising with $31.6 billion in the most recent quarter-a figure closely tracking its Q4 haul. That brings the sponsor’s trove to $148 billion, roughly half of which is earmarked for private equity. 

But deployment lagged last quarter, in a sign that Stephen Schwarzman’s vehicle continues to be discriminating about investment opportunities. Investment activity came in at $17.7 billion for the quarter, lower than Credit Suisse analysts’ projected $18.3 billion and substantially off the $25.4 billion deployed in Q4.

To figure out if this reticence is part of a wider trend, watch for other funds’ deployment levels as earnings season continues: there’s an abundance of language that suggests the surge in deals late last year was driven by opportunistic valuations. Will deal flow cool as pandemic-stricken valuations recover?

In KKR’s annual letter, for instance, founders Henry Kravis and George Roberts note they “dove in head-first when others stood on the sidelines, and we capitalized on opportunities to invest in strong balance sheets at compelling discounts.” The fund deployed $48 billion across its carry funds and traded credit, with $10 billion invested in traditional private equity in 2020. It’s worth watching whether Q1 reveals higher KKR investment levels. 

In light of smaller investment flow, the Toshiba approach can be seen differently. If Toshiba is truly a test case for the mega LBO or the level of PE acquisitiveness, the reason why it is an attractive takeover target should be the starting point. Revenue declined in at least the preceding 3 years prior to CVC’s reported interest. Perhaps financial sponsor interest is more opportunistic than evidence of froth.

Low interest rates and the growing trend of deploying third-party capital alongside committed funds certainly makes larger deals possible, even if the right target has yet to materialize. Speaking of…

Where to next? That’s the question Blackstone president Jon Gray might hope to hear from the lips of every quarantined consumer as much as from his LPs. For financial sponsors chasing the typical deal size, opportunities still abound. The fund will invest on the premise that stimulus and consumer savings will lift travel industries. “We continue with our thematic focus including sustainability and the post-Covid travel recovery,” Gray said on yesterday’s earnings call. “We recently committed to acquire Desotec, an environmental services business in Europe and favor an electrification infrastructure company.” Hotels, aviation, and a theme park compose recent acquisitions.