Joan Solotar, Global Head of Private Wealth Solutions at Blackstone and speaker at Future Proof 2022, shared her expertise on alternative investments, market trends, and the exciting opportunities that lie ahead. Join us as we delve into the world of private markets and explore the transformative potential of energy transitions, while debunking misconceptions and addressing the challenges faced by financial advisors in today’s dynamic landscape.
Future Proof: The topic of alternative investments is huge with financial advisors right now. What are some of the most high-conviction investment ideas you have at this time?
Joan: We do a lot of analysis up-front, gain a lot of conviction, and then we’re all in in the areas that we like – what we call “good neighborhoods.” In terms of asset classes, one of the best opportunities that we see right now is in private credit, which is a result of the combination of higher base-rates, wider spreads, seeing banks contract, and a need for capital. This is an opportunity where you could be in a safe part of the capital structure and generate equity-like returns, meaning double digits. That’s quite positive.
As it relates to real estate, you read a lot about a negative sentiment on commercial real estate, but what’s very different this cycle (and as you know, we are the largest investors in commercial real estate in the world), is that you have a bifurcation. So on the positive front, areas where we’re seeing strong demand and limited growth in terms of limited building, limited new starts, etc. so warehouses, adicenters, rental homes particularly in the south and southwest, that’s very positive still. On the other hand, you’re seeing very high vacancy rates, particularly in urban areas in offices, and that is going to continue to create pressure.
I’d say the same in terms of retail (ex. malls) so it’s like the tale of two cities there. We’d still like other areas such as life sciences where there’s just a mismatch in capital need and capital availability.
Energy transition would be the fourth. All of these are very conscious of what your basis is and what you’re paying for those assets, but those are some areas that we like the best right now.
FP: I want to dig into the energy transition. This seems to be something you’re hearing more and more investment go into and technology improvements. Are those the reasons you are constructive, or are there other factors that we’re just not seeing right now making energy transitions so exciting?
Joan: Think about wherever you are in the landscape and no matter what your views are, the world is transitioning. It’s becoming more efficient in wanting to move to cleaner sources of energy, but in order to get there, it’s going to take a lot of time and a lot of capital. Our philosophy around it has been that we can create significant value for our investors – not by saying we won’t invest in XYZ, but saying that we’ll invest in X and we’ll make it cleaner, more efficient, and the like. One small example would be electrifying the service stations on highways and making them more efficient. It’s not just investing in clean energy, it’s transitioning what exists today, that may be less clean and less sufficient, and then making it better.
FP: Suppose an investor is new to this area. Can they think of it as transitioning some infrastructure and something they’re more used to hearing about modernizing the infrastructure for cleaner energy?
Joan: That’s a great example. A lot of this will reside in infrastructure funds and those that are investing in this particular sector, but that is definitely one way to access it.
FP: We’ve covered real estate, and we talked about energy. These are both areas that most investors didn’t have access to traditionally. What do you think will be the outcome of more and more investors having access to these private markets that they traditionally didn’t?
Joan: The are three hurdles, and the two biggest hurdles are education and technology. The third is that we didn’t have access to good products from institutional quality fund managers. A lot of that has changed and we’re still in early stages. We’re doing a lot on the education front, but there’s still much more progress that needs to be made in technology. We take for granted e-signature, but that tends to be a big deal. Being fully electronic so that you’re no longer mailing documents and getting wet signatures and getting them mailed back. Ultimately, you want it to be as easy as buying stocks and bonds, and that’s not where it is yet. You are seeing the adoption rate go up significantly, however. That said, individuals are still under-allocated in private investments. I’ll give you a couple stats that are fascinating:
- More than 92% of commercial real estate is private (not publically-traded)
- Publicly traded companies with $100M or more in revenue account for 10% of companies
- If you open that up to $250M in revenue, it’s only 20%. The private investing world is multiples of what you could own in public markets, so you’re just getting a small slice of the investible universe.
FP: That makes for a very compelling case! The Future Proof audience is made up of primarily financial advisors. What challenges are advisors facing today, and how can they move through them easier now than in the past?
Joan: I don’t know if they’re challenges, but rather misconceptions around private investments. The main one is conflating illiquidity with risk. There is an illiquidity premium – private investments over time earn more than public investments, whether it’s private equity, private real estate, private credit – looking at their public counterparts and they’re also less volatile. In exchange, you are giving up some liquidity so this has to be for the portion of your portfolio that you don’t need to access in a month, three months, etc. That’s still a misconception we’re working through today, that somehow these are riskier, when in fact the statistics would tell you that is the opposite.
The biggest hurdle remains education, and we do that person by person. There are a lot of materials out there that you can access on the web, but we’ve found that advisors want to make sure that they fully understand how these funds work, what the risks are, what is in the portfolios, and a lot of that you just need to do in person.
FP: Is that something where they can do their homework, or is that working with someone like yourself and your team? How do they dig into that to remove the misconception that there’s more risk here because it’s where their cash is tied up?
Joan: We have a lot of educational materials, we host Blackstone Universities, we do regional seminars, and we have people all over the U.S. and the world catering to each channel. We’re happy to meet with advisors to spend as much time as they want on it and take them through the analysis and the history, and the case study to make sure they’re comfortable.
FP: Advisors aren’t investing in anything if they’re uncomfortable with it! It’s tough to take that risk for your clients if you yourself aren’t comfortable with it. Before we run out of time, you were a speaker at Future Proof in September 2022. What would you say has been the biggest change in the alternatives world and the private markets we didn’t see last September?
Joan: Interestingly, I may have had a different answer a few months ago! But given what we’ve all witnessed in the banking system, I would say those challenges, a mismatching of assets and liabilities, have shined a light on the strength of our model. Whereas some may have asked for greater liquidity, there’s a much greater appreciation today for why we put caps in our funds. We don’t want to buy a building and have to sell it in a day or at the wrong time.
The conversation has also allowed us to talk about our strengths. We don’t take investor deposits. We don’t mismatch daily liquidity with long-term assets. We make sure we can time the going-in investment, and when we sell it, so we’re not caught in a squeeze or a fire sale. Even in these semi-liquid products, which are much more broadly distributed, there’s a certain level of safety. That conversation has dramatically changed over the last month.
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