Blackstone’s Gray: DC money will first go to private real estate, secondaries

In the firm’s Q2 earnings call, Jonathan Gray pointed out where in private markets he thinks investment from defined contribution benefit plans will get directed to first.

Blackstone president and chief operating officer Jonathan Gray believes target date funds will be the go-to vehicle for accessing 401(k) money, with opportunities in real estate and secondaries markets, the executive said on the firm’s Q2 earnings call.

“I think it’s unlikely you’re going to see direct investment,” Gray said. “I think target date funds run by plan sponsors is the most likely vehicle for accessing 401k money.”

He added: “Real estate is probably the easiest place to start, because there is some real estate already in the 401(k) market.”

Gray thinks DC money will also be directed to the secondaries market, due to its diversification and relative liquidity.

“Over time, hopefully we’ll move to traditional private equity,” he said.

Gray declined to comment on whether the firm had begun talks with large or small plan sponsors.

Gray also remarked that alternative investment firms like Blackstone are “really an important component in terms of providing retirement security to many Americans and many folks around the world.”

“This is a very interesting opportunity for us in our industry going forward,” he said. “There are obviously retirement savings challenges for Americans, and we think this decision by the DoL was a step in the right direction for sure, because of the strong performance of alternatives.”

But the road to the first 401(k) client will be long, Gray said.

“We think it’s a long journey because there’s a system in place and we have to work with folks over time to get them to move in this direction. So we see it as a real opportunity but something that will take time to emerge.”

Valuations rebound

The firm’s corporate private equity portfolio saw a 12.8 percent rebound in value in Q2 from Q1, when the burgeoning pandemic shook markets globally.

During the firm’s Q1 earnings call, Blackstone executives emphasized that the 21.6 percent depreciation in its corporate PE portfolio at the end of the first quarter reflected unrealized marks and said values were likely to swing back with time.

“You can see that recovery underway in our second-quarter returns, including double-digit appreciation,” said Gray.

Although the firm is confident in the progress its individual assets have made since March 30, it recognizes markets are still in uncertain territory.

“Our valuations continue to reflect a cautious outlook, recognizing the ongoing uncertainty around the timing and shape of recovery curves for individual assets,” said Michael Chae, chief financial officer.

When asked by an analyst whether the firm’s valuations process has changed in recent months given the intense market volatility, Chae assured listeners that its process has remained constant.

“Our approach remains the same in terms of our process,” he said, adding that despite the challenging Q1 environment, the firm stuck to its existing methods.