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Apollo and Blackstone build $250bn ‘permanent capital’ war chest

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Via Financial Times

Apollo and Blackstone control more than $250bn of “permanent capital” that never has to be returned to investors, according to results posted on Thursday, marking a shifting business model that entrenches the power of America’s two biggest private equity firms.

The milestone for the alternative investment industry came as Stephen Schwarzman hailed “a momentous year for Blackstone and our shareholders,” in which the firm sealed $63bn of new investments and raised $2.13 of new capital for every dollar it deployed.

A $6.5bn flurry of real estate transactions in the final quarter of 2019 saw Blackstone sell off its remaining stake in a portfolio of more than 70,000 single-family homes across the US, as well as an apartment building portfolio in Sweden. The disposals helped Blackstone beat analysts’ expectations of a key measure of profit by 21 per cent, with earnings before interest, tax, depreciation and amortisation weighing in at $1bn for the quarter.

Apollo beat street estimates by a margin of 38 per cent, with distributable earnings of $476m in the last three months of the year, helped by standout returns of 13 per cent in its structured credit business, and $1bn worth of real estate realisations.

Both firms have come close to doubling their share price over the past twelve months, thanks largely to their decisions to ditch a tax-advantaged partnership structure that investors regarded as unwieldy. Blackstone’s move “allow[s] a vastly wider universe of investors to own our stock,” Mr Schwarzman, the Blackstone co-founder, said.

But the changing way the biggest private equity firms raise money from investors could, in the long run, be even more significant. Both Apollo and Blackstone are increasingly creating “permanent capital” vehicles that raise money from investors once and keep investing it forever, a shift from the traditional business model in which buyout executives ask pension and wealth funds to commit new capital every few years.

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Blackstone now controls $104bn of perpetual capital, nearly one-fifth of its total war chest. Apollo, which began the trend when it set up life insurance company Athene Holding shortly after the financial crisis, says that permanent capital vehicles now account for fully half of the $331bn of assets that it controls.

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