BMBL Bumble Inc

By Miriam Gottfried | Photographs by Jose A. Alvarado Jr. for The Wall Street Journal 

Blackstone Group Inc. became an investing powerhouse by making successful bets on undervalued companies. For the next leg of its expansion, the firm is focused on companies with big growth prospects, even if it has to pay up for them.

Since Jonathan Gray became Blackstone's day-to-day leader in 2018, he has encouraged the heads of its businesses, who collectively manage $619 billion of assets, to develop big-picture convictions and invest in companies or assets that stand to benefit from those trends.

The new approach has led the New York firm to plow billions into faster-growing companies -- including in the technology sector -- to which it previously paid less attention.

It has taken Blackstone out of its traditional comfort zone of turning underperforming companies around through cost cuts and efficiency improvements -- and juicing returns by employing ample helpings of borrowed money.

The growth bug has bitten nearly every corner of the sprawling firm, including its real-estate, credit and hedge-fund businesses. Among the assets in its main buyout fund is a big stake in Bumble Inc., which Blackstone acquired in 2019 in a deal that valued the owner of the dating app at $3 billion. The stake has nearly quintupled in value as the company's market capitalization shot to about $14 billion following its February initial public offering.

Mr. Gray's thematic approach and the growth orientation it has spawned show how the 51-year-old heir-apparent to Chief Executive Stephen Schwarzman is making his mark on the firm as it barrels toward a goal of managing $1 trillion in assets by 2026.

"Investing is about looking forward, but the future is now coming faster, " he said in an interview. "You want to be exposed to businesses that benefit from this change."

A big goal of his is for employees in the firm's disparate businesses to all think about the same themes and discuss them with each other.

Blackstone has long been interested in identifying growing industries, but under Mr. Gray has become more clear about what it won't buy, said Joseph Baratta, global head of private equity at the firm. In addition to brick-and-mortar retailers, that list includes established media-and-telecommunications providers and companies reliant on single-use plastics.

"There are certain types of companies that we're just not going to invest in, no matter how cheap they are," Mr. Baratta said.

The strategy isn't without risk. The assets the firm is collecting could be among the first to get hit if, for example, the recent increase in interest rates continues as the economy emerges from the pandemic-induced lockdown.

Rivals such as Apollo Global Management Inc. have largely resisted the allure of the growth strategy, preferring instead to put money into hard-hit areas like gaming and physical retail. But even the historically value-focused Apollo has done more technology-related deals in its most recent buyout funds. The firm also raised two blank-check companies targeting growth-oriented deals.

Among the themes that have guided recent Blackstone investments are the ongoing shift to e-commerce and the technology-fueled advancement of the life-sciences industry.

The firm has launched a new business dedicated to investing in life sciences -- including by backing new drugs in the late stages of development, the last thing a traditional leveraged buyout would target. It hired Jon Korngold, a veteran of growth-investing pioneer General Atlantic, to build a new business taking minority stakes in growing companies.

Blackstone, which previously had virtually no West Coast presence, has opened a San Francisco office and hired executives and advisers from technology companies such as Amazon.com Inc. and Snowflake Inc.

And in November, it hired Jennifer Morgan, former co-chief executive of business-software giant SAP SE, to lead a team helping the firm's 200-plus portfolio companies "drive growth through digital transformation."

Blackstone isn't alone. An increasing number of its rivals and stock investors have embraced growth as a decadelong bull market pushes up the price of all manner of assets and leaves fewer and fewer pockets of value. The two-year rolling average of purchase-price multiples for U.S. buyouts reached a record 12.8 times earnings before interest, taxes, depreciation and amortization in 2020, according to an analysis by McKinsey & Co. That's up from 11.9 times in 2019 and 10.2 times in 2015.

Mr. Gray's thematic push was born from personal experience. He led Blackstone's $26 billion deal to buy Hilton Hotels Corp. on the eve of the financial crisis. As the hotel chain's business suffered during the ensuing economic downturn, outsiders would often label the deal a failure. Instead, Hilton became one of the most successful private-equity investments of all time, ultimately reaping more than $14 billion in profits, or more than three times Blackstone's initial investment.

Mr. Gray said the experience taught him that the efforts of Blackstone and Hilton's management may not have been enough if the company weren't the beneficiary of a long-term growth trend in global travel, the thesis that underpinned the investment.

"In the fullness of time, what mattered was you picked the right neighborhood, not the right house," Mr. Gray said.

(Mr. Gray's fondness for hotels abides, witness Blackstone and Starwood Capital Group's agreement this month to acquire Extended Stay America Inc. in a bet that a rare bright spot for the lodging industry during Covid-19 will continue to thrive.)

He also led the firm's first foray into industrial warehouses in 2010, betting on the ascendance of e-commerce around the world. Blackstone is now the largest owner of warehouses used for e-commerce, with a roughly $100 billion portfolio consisting of 880 million square feet of such properties around the world.

The two highly successful real-estate bets helped propel Mr. Gray's rise at the private-equity giant.

One example of how his growth-related themes are being applied across the firm is Blackstone's April 2020 investment in biotech company Alnylam Pharmaceuticals Inc. The $2 billion deal consisted of a $1 billion investment led by Blackstone Life Sciences in a portion of the future total royalties of a cholesterol drug.

Its credit arm also provided Alnylam with a term loan of up to $750 million, and Blackstone bought $100 million of the company's stock. The firm's real-estate business also owns Alnylam's landlord, BioMed Realty, which consists of 91 life-science properties. Blackstone last year agreed to sell the company from one of its funds to another in a deal that valued BioMed at $14.6 billion.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

(END) Dow Jones Newswires

March 21, 2021 05:44 ET (09:44 GMT)

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