Why private equity is poised to feast on shaky European economy

"We are sitting on a very large amount of dry powder." Those were the words of Jon Gray, the very rich and very shrewd president and COO of Blackstone Group, speaking recently to Mark DeCambre, editor-in-chief of MarketWatch. 

Where it gets deployed is still unsettled, but according to Gray, Europe, more specifically the UK, look like good bets. His declaration is a harbinger of things to potentially come from the likes of KKR, Brookfield and more as large institutions ready to scoop up assets at cheaper prices given the unsteady macro environment and higher costs that are forcing real estate owners, in some cases, to reevaluate their portfolios.

"Globally, there are challenges," Gray said, alluding to the fraught energy market in Europe fuelled by the war in Ukraine and further tightening of the debt markets, with the European Central Bank's latest decision to hike up interest rates further. Higher interest rates are doubly bad in Europe, where, Gray said, many follow a floating-rate model rather than fixed. "It will be a tough year or two in Europe," he said.

The market, however, prices that in and private equity is ready to strike. Gray alluded to stock in Europe trading at less than nine times earnings. "This creates opportunities and we are looking for opportunities even though the near-term picture looks challenging."  

Gray ticked off the benefits of investing in the UK: it's an English-speaking country with rule of law, transparency, liquidity and a magnet for talent. "It lends itself to success and if you believe in something long term, and prices fall, that creates opportunity."

In sum, Gray preached patience and perseverance in the current climate, but also a tenacity to pounce. "The inclination is to wait for the all-clear sign, but that could be too late," he warned. "You want to stay calm and don't sell in panic."

Exuding confidence is a hallmark of investment (Blackstone has made bold plays before), but Blackstone, as others, is under no illusion that the current market is an easy one, owing to myriad headwinds, as Blackstone CEO Stephen Schwarzman said on his company's third-quarter earnings call. "Inflation, rising interest rates and a slower economy, combined with ongoing geopolitical turmoil, have created an extremely difficult environment for investors to navigate," he said.

Still, as Gray pointed out, Europe has held strong. "Europe has held up better than people expected," he said. He alluded to the fact that Blackstone saw 17-percent revenue growth in its private equity portfolio. "The fact that we've done so much in private equity, in travel and leisure bodes well for us," he said.

The optimistic company line was recently echoed by Kathleen McCarthy, senior managing director and global co-head of Blackstone’s real estate sector, at the Urban Land Institute's annual fall meeting. "We are in a great sector for an environment like this," McCarthy said. "In an environment where costs are rising and you need to generate cash flow growth, real estate is a great place to be overall."

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Like hospitality, which benefits from nightly leases and the ability to reset rates on a daily basis, and which McCarthy called a "high conviction" play. "For our hospitality assets, there has been a 30-plus year trend line up and to the right as the demand for travel, from personal to leisure to business has increased," she said. "We are entering this tougher economic moment with capital and cranes more in check now than they have been in prior cycles, which positions our real estate assets to do quite well."

Other large institutions are as bullish on Europe as Blackstone. In April, Brookfield's managing partner and head of Europe and Asia private equity and global head of business development, Anuj Ranjan, told Private Equity International that Brookfield would be making more of an effort to accelerate its growth in the region. In order to accelerate growth, earlier this month Brookfield hired former Goldman Sachs partner Richard Powers as its first COO of European real estate.

Meanwhile, a €24-billion refinancing gap could be the impetus to force asset sales, Bloomberg writes, as borrowing costs rise. "This will inevitably lead to forced sales amongst commercial and residential property owners,” Nicole Lux, senior research fellow at Bayes Business School, told Bloomberg, adding that it will be the well-funded companies and investors who can potentially pick up assets at bargain prices.

interest rate costs