Blackstone’s Private-Equity Returns Trail the S&P 500

The S&P 500 index has been crushing private-equity returns in the past year, and Blackstone ’s second-quarter results illustrate that trend.

As part of its earnings release early Thursday Blackstone said its corporate private-equity returns in the year ending in June were 11.3%. That compares with a 24.5% total return for the S&P 500.

In the prior year ending in June 2023, the S&P 500 topped Blackstone with a 19.4% return against 9.7% for the firm’s corporate private-equity business, which has $145 billion of assets and remains one of its most important areas along with real estate.

Blackstone is the leading alternatives firm with over $1 trillion in assets under management and has the largest market value of any public investment firm at more than $160 billion.

Driven by Nvidia , Microsoft , Apple , Amazon and other big technology stocks, the S&P 500 has handily topped most asset classes in the past several years.

Another sign of more difficult times for private equity came earlier this week from Calpers, the $503 billion California pension fund, when it reported it s preliminary returns for its fiscal year ending in June . Calpers is one of the first major endowments or pension funds to report results for the June fiscal year. undefined The pension fund, a major player in private equity, said its private-equity investments gained 10.9% net of fees—although that figure is lagged one quarter. Calpers’ public-equity investments were up 17.5% in the year ended June—its strongest asset class. Private equity remains a favorite of many pension funds and leading university endowments like those of Harvard and Yale. Their view is that private equity can beat public-market returns over the long term.

But the private-equity business has gotten tougher in recent years due to keen competition for deals, higher interest rates and a less receptive IPO market, which has made exits tougher.

And private-equity portfolios of firms like Blackstone look nothing like the S&P 500, given their investments in small to midsize companies.

Blackstone, for instance, bought a majority stake in Emerson’s climate technologies business last year and more recently purchased Tropical Smoothie, a franchiser of fast-casual cafes. It also holds a stake in Bumble, the publicly traded online dating site, and it’s an investor in actress Reese Witherspoon’s media company, Hello Sunshine. Blackstone’s corporate private-equity business runs $145 billion and has 82 investments, according to the firm’s website.

Blackstone’s private-equity business has strong long-term returns including a gain of over 50% in the year ended in June 2021 when it handily topped the S&P 500 index.

But the S&P 500 index has become difficult to beat more recently and it’s dominated by some of the best companies in the world. It carries less risk than private equity, given the cash-rich balance sheets of its leading companies like Apple , Microsoft and Alphabet .

Private-equity firms, by contrast, often use considerable leverage to boost returns. Investors can get exposure to the S&P 500 through index funds that charge 0.1% or less in annual fees and with immediate liquidity.

A key risk with the S&P 500 is its vulnerability to a selloff in the leading tech firms that now make up over 40% of the index. The recent rotation into smaller companies illustrates that.

Blackstone shares gained 1.1% to $136.31 Thursday in the wake of its earnings news as investors focused on rising investment deployments and positive management comments on the firm’s outlook.

The firm’s nearly $40 billion of inflows and $34 billion of capital deployment during the second quarter marked “the highest level of investment activity in two years,” Chief Executive Officer Stephen Schwarzman said in a statement.

Citi analyst Christopher Allen wrote in a note to clients on Thursday that while Blackstone’s overall performance was mixed, the outlook appears to be improving given fund-raising and deployment trends.

Investors also were heartened by Blackstone President Jon Gray’s comments about a bottoming in commercial real estate and strong capital deployment in that area.

But ultimately, the game for Blackstone and its alternatives peers is about performance—particularly beating low-fee public investments like the S&P 500. That seems to be getting more difficult.

Australia’s commodity-rich economy recorded its weakest growth momentum since the early 1990s in the second quarter, as consumers and businesses continued to feel the impact of high interest rates, with little expectation of a reprieve from the Reserve Bank of Australia in the near term.

The economy grew 0.2% in the second quarter from the first, with annual growth running at 1.0%, the Australian Bureau of Statistics said Wednesday. The results were in line with market expectations.

It was the 11th consecutive quarter of growth, although the economy slowed sharply over the year to June 30, the ABS said.

Excluding the Covid-19 pandemic period, annual growth was the lowest since 1992, the year that included a gradual recovery from a recession in 1991.

The economy remained in a deep per capita recession, with gross domestic product per capita falling 0.4% from the previous quarter, a sixth consecutive quarterly fall, the ABS said.

A big area of weakness in the economy was household spending, which fell 0.2% from the first quarter, detracting 0.1 percentage point from GDP growth.

On a yearly basis, consumption growth came in at just 0.5% in the second quarter, well below the 1.1% figure the RBA had expected, and was broad-based.

The soft growth report comes as the RBA continues to warn that inflation remains stubbornly high, ruling out near-term interest-rate cuts.

RBA Gov. Michele Bullock said last month that near-term rate cuts aren’t being considered.

Money markets have priced in a cut at the end of this year, while most economists expect that the RBA will stand pat until early 2025.

Treasurer Jim Chalmers has warned this week that high interest rates are “smashing the economy.”

Still, with income tax cuts delivered at the start of July, there are some expectations that consumers will be in a better position to spend in the third quarter, reviving the economy to some degree.

“Output has now grown at 0.2% for three consecutive quarters now. That leaves little doubt that the economy is growing well below potential,” said Abhijit Surya, economist at Capital Economics.

“But if activity does continue to disappoint, the RBA could well cut interest rates sooner,” Surya added.

Government spending rose 1.4% over the quarter, due in part to strength in social-benefits programs for health services, the ABS said.