The New Financial Supermarkets

Three decades ago, Jonathan Gray might have been an unlikely candidate to become Blackstone’s president and expected successor to its chief executive, Stephen A. Schwarzman.

Very little of Mr. Gray’s career at the private equity firm has involved leveraged buyouts — the aggressive deals, often involving large amounts of borrowed money and steep cost-cutting, that gave private equity its rapacious reputation. Instead, he has spent most of his time in Blackstone’s comparatively staid real estate business, helping the firm become one of the biggest property owners in the world.

Mr. Gray’s elevation to president in 2018 reflected Blackstone’s growth into a behemoth with a hand in just about everything: mortgage lending, infrastructure, television and film studios, stakes in entertainment companies, pharmaceuticals, and even the dating app Bumble.

Blackstone is in the vanguard of an industry leaving its roots far behind. Since the 2008 financial crisis, it and its private equity rivals like Apollo Global Management, KKR and Carlyle have refashioned themselves into the supermarkets of the financial industry. They span areas of traditional finance long dominated by banks and investment categories typically dominated by hedge funds and venture capital.

“Private equity firms are the financial conglomerates now,” said Richard Farley, a partner at the law firm Kramer Levin, who works on leveraged buyouts and lending.

While money continues to pour into their investment funds from traditional clients like pension funds and retirement plans, private equity firms are not only buying up companies with investors’ money but also putting their own money on the line with new business ventures.

Globally, private equity firms managed $6.3 trillion in assets in 2021 — more than four times what they oversaw at the onset of the financial crisis in 2007, according to the data provider Preqin. Blackstone, the largest, told investors this year that it was on track to manage $1 trillion by the end of 2022 — four years ahead of its goal.

Even the term private equity is a misnomer, since many big firms are public. Over the past two years, shares of Blackstone are up more than 145 percent, while Apollo and Carlyle are up more than 85 percent and KKR is up about 130 percent. The S&P 500 index, meanwhile, rose more than 55 percent. TPG — a rare company deciding to embark on an initial public offering in the midst of a down and volatile market — is trading only slightly below its January offer price.

The performance of their stocks is a sign of the prospects for growth, said Jim Zelter, an Apollo co-president. “Investors see the business model we’ve created as being at the intersection of companies who need to borrow and investors who need different choices,” he said.

The industry looks far different from its early days.

In 1982, a private equity firm, Wesray, bought Gibson Greeting Cards, a unit of RCA, for roughly $80 million. Wesray’s two owners contributed just $1 million, using debt and the sale of Gibson’s real estate holdings to fund the rest. A year and a half later, they took the company public for $290 million, but first paid themselves a $900,000 special dividend.

Wall Street financiers were mesmerized by the nascent industry’s ability to create giant profits with very little money down, and over the next two and a half decades, more firms were built to race into these types of deals. Buyouts grew in size until the 2008 financial crisis — when many either fell apart as banks withdrew lending or produced abysmal returns. For many years, leveraged-buyout volume was less than half of what it was before the crisis, according to Dealogic data.

But the crisis provided the industry with two key catalysts. First, record-low interest rates for more than a decade have pushed investors to seek out higher returns through riskier investments — particularly after the hits their portfolios took during the mortgage meltdown. Second, as government regulations forced banks to pull back from riskier areas including high-interest lending, private equity firms jumped into the mix.

“They’re opportunistic companies,” said Patrick Davitt, a senior analyst with Autonomous Research. “The large alternative asset managers have taken the opportunity to fill that white space left by banks.”

Apollo, for example, lends to medium and large corporations, but also makes loans for aircraft and mortgages. KKR has also built out its underwriting operation, allowing the industry to take a portion of the lucrative fees associated with pricing these deals.

Mr. Gray said Blackstone and its rivals could make some lending activity cheaper and more efficient by lending directly, in contrast to the bank approach of syndicating a loan — essentially promising the money but finding others to provide it.

But in a hunt for more money to manage, private equity did more than offer a way to bypass banks. Firms became landlords, insurance providers and late-stage equity investors. In 2009, Apollo helped start Athene Holding, which sells retirement products such as annuities — a type of insurance designed to boost retirement savings — and reinvests the premiums Athene collects by selling those products. Other firms followed the same path; KKR bought a life insurance company last year for roughly $4.7 billion.

As the real estate industry teetered after the mortgage crisis, Blackstone used its capital to buy up and rent housing and other real estate, amassing $280 billion in assets, which produce nearly half of the firm’s profits. As interest rates rise, Mr. Gray predicted, real estate will continue to help its performance. Rents in the United States, he noted, have recently risen at two to three times the rate of inflation.

Blackstone also ramped up its business of taking stakes in fast-growing companies, including the women’s shapewear company Spanx and Reese Witherspoon’s media company Hello Sunshine. Its life sciences division has been buying pharmaceutical companies or stakes in them, and also pursuing drug development in cooperation with big drugmakers. And it plans to spend $1 billion to acquire rights to artists’ music through a partnership with Hipgnosis Song Management, which owns rights to the songs of Neil Young, Steve Winwood, Barry Manilow and others.

But Mr. Gray said the biggest change for Blackstone had come as the firm realized it could attract clients outside the typical pool of large institutional investors it historically served.

“Our industry historically catered to a fairly narrow audience of customers,” he said.

Big investors long leaned on a mix of stocks and bonds for reliable returns, and risked only a small slice of their holdings on private equity, which requires investors to commit money for five or 10 years on average. In return, the firms generally aimed for returns of 15 percent or more over longer horizons.

But in recent years, Blackstone found that everyday investors could be lured by the potential for bigger returns than they might get elsewhere, Mr. Gray said.

The sudden and synchronous growth of private equity’s business lines and client base has added to concerns about the sway of the so-called shadow banking industry, which also includes hedge funds and venture capital firms. The Securities and Exchange Commission is looking at new rules that would require such entities to disclose more information about holdings, fees and returns.

While banks that are considered important to the financial system have faced stricter guidelines on lending and risk since the financial crisis — and try to avoid serious problems if a large number of companies were to suddenly default — private equity firms are lightly regulated, even though they don’t have the same governmental backstop. Some critics contend that the combination of more lending and fewer restrictions could rattle the economy if the firms’ bets go south.

David Lowery, the head of research insights at Preqin, said private equity firms had been “very good” at selecting companies and avoiding defaults, but during a time of relative stability. “That strength will be tested,” he said.

So far, the unbridled expansion has been good for business. Consider the eye-popping windfall received by Mr. Gray’s boss at Blackstone last month.

For 2021, Mr. Schwarzman’s compensation was $160 million — roughly 4.5 times that of the highest-paid bank chiefs, James Gorman of Morgan Stanley and David Solomon of Goldman Sachs, who each received roughly $35 million. And Mr. Schwarzman’s pay package was dwarfed by the dividends he earned, which pushed his total haul to more than of the $1.1 billion.

Blackstone’s push into seemingly everything is working well for the firm. “Blackstone,” Mr. Schwarzman told investors in late January, “reported the most remarkable results in our history on virtually every metric.”