“You have historically high multiples of cash flow, low yields,” he said.
“The scale of misallocation of capital prompted by Federal Reserve policy in the last eight years is enormous,” Baratta said. “And how that has affected valuations relative to fundamentals [is something] I have never seen in my career.”
He said Blackstone’s value-oriented strategy of investing is harder to pursue at the moment and is pushing Blackstone, one of the world’s largest private equity firms, to a slower pace of allocation, with an investment period that might usually last for three years now stretching to five years.
In terms of total enterprise value, Blackstone is “looking at smaller, more under-levered transactions than doing the really big public-to-privates that you’re seeing many of our competitors do”, Baratta said. “We don’t see value in that end of the market right now.”
Baratta said his firm’s latest capital pool, Blackstone Capital Partners VII, which held a final closing in late 2015 with $ 18 billion, started its investment period in May. Blackstone sees value in cyclical industries and sectors that are out of favour, including asset managers, pharmaceutical companies and energy, he said.
The New York firm, with $ 356 billion in assets under management as of June 30, has over the past six months invested in two energy platforms in the Permian Basin. Blackstone formed Jetta Permian with oil and gas developer Jetta Operating Co, and committed about $ 500 million to Guidon Energy, a Dallas-based platform company that Blackstone formed earlier this year to pursue shale gas development in the Midland Basin.
Baratta said the Permian Basin is a good location with well-delineated reserves of oil and gas.
“We’re basically buying unlevered reserves in the ground that we know are there with no pressure to actually drill and pump it out of the ground in the wrong moment,” he said.
He added that since Blackstone’s investments, strategics have stepped in and scooped up assets in the Permian Basin as well.
“We were paying $ 23,000 to $ 25,000 an acre, and things are now trading as much as twice that,” Baratta said. “This was just sort of a lucky moment for us. We feel good about what we’ve bought.”
But he said Blackstone remains “concerned about where the long-term price of oil ultimately settles out”.
On overseas investments, Baratta said that while “Brexit is confounding in the way the US political election is confounding,” politics across the pond doesn’t affect the way Blackstone thinks about investing in Europe in the long run, despite short-term uncertainties.
“The world’s a screwed-up place,” he said. “Our job isn’t to predict what might happen with regard to the European relationship. If we find a great UK business [that is] well positioned that we can buy at a reasonable multiple of cash flow, we’ll buy it without regard to speculating,” he said. “We’re hoping that it creates a value dislocation and that we can buy assets more cheaply to reflect the risks that particularly are present in Europe.”
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