Blackstone Group’s top executive, who is the world’s biggest alternative asset manager has warned of the impact that recent increases in US long-term government bond yields would have on consumers and the economy.
Jonathan Gray, President of Blackstone said in an article that the increase in yields on 10-year Treasury bonds would force consumers into tightening their belts.
Gray said that when 30-year mortgages or car loans are 8 percent more expensive, it will affect consumer behavior. Gray said that the growth has been resilient but if policy is kept this tight for this long you will invariably cause an economic slowdown.
The 10-year Treasury yields reached their highest level since 16 years on Wednesday, which caused the global stock markets to drop. The 30-year Treasury yields also increased to over 5 per cent.
Gray said that the recent rise in rates would have a negative impact on financial assets in general. Gray added that there is a significant impact on all financial assets when the 10-year Treasury moves in this way.
Blackstone’s third-quarter earnings were weaker than expected, indicating an unexpected slowdown in fundraising efforts. This was particularly true for its flagship fund.
Blackstone raised only $25bn of new investor funds during the three-month period ending September. This is less than the $32bn that Bloomberg’s polled analysts had predicted and represents a drop from the second quarter, when it raised a little more than $30bn.
The New York-based group of private equity raised only $846mn in corporate buyouts during the third quarter. This is a fraction from the $5.8bn raised by the New York-based group in the second quarter.
Gray explained that institutional investors decided to defer committing to new private equity funds until 2024. This was the cause of the slowdown.
As interest rates rise, many large investors including pension funds and sovereign wealth fund are overexposed to private assets. This is because rising interest rates has affected public valuations as well as made it difficult for buyout firms and other investors to return cash.
The overexposure of the financial crisis has led to institutions rethinking their commitment to new funds. This has also caused large private equity firms such as Blackstone Group, Apollo Global, and Carlyle Group, to reduce their fundraising targets.
Blackstone had warned earlier this year that the current fund for buyouts would be smaller than $26bn raised by Blackstone in 2019. Gray stated that Blackstone was on track to reach the guidance it gave earlier in the year, which called for raising more than $26bn.
Blackstone’s credit and insurance businesses, for example, benefited from rising rates. Investors have poured $55bn into the unit in the last 12 months, believing that rising rates will be beneficial.
Blackstone’s results for the quarter also revealed that financial markets were in a state of flux, making it difficult to sell investments or realise lucrative performance fees. This impacted overall earnings.
Blackstone’s distributeable earnings, a measure analysts use to gauge its cash flow, were $1.2bn or 94c per share. This was below the consensus expectation of $1.01 from Bloomberg-surveyed analysts.
Blackstone shares fell by more than 6 percent in New York morning trading, but they remain 25 per cent higher than the beginning of the year.
Gray predicted a rebound of financial transactions once investors were confident that rates would stop rising.
He said that when interest rates stabilize and the Fed has finished, at some point the 10-year Treasury will settle, giving more terra firma to investors. “Ultimately, there will be a pent-up need to sell businesses, finance, and deleverage.