Blackstone’s high-class problem: too many rich dentists

This is a high-class problem to have. But it’s a problem, and Blackstone looks right now like the dog that caught the car.

For one thing, too much money chasing too few deals almost never ends well. And a suburban dentist — forever the prototype of a semi-rich everyman drawn to the glitz of private-equity — isn’t giving Blackstone money thinking it’s going to end up in the hands of a middle-market buyout shop.

Blackstone could simply slow down its fundraising. It’s not a bank, and doesn’t have to take every dollar people want to give it. Investment firms cap the size of funds they raise from big institutions all the time, knowing there’s a limit to how profitably they can put that money to work.

But Wall Street isn’t in the business of turning money away, especially not now, and especially not publicly listed firms, which have become asset-gathering machines whose stocks trade on how much money they invest, rather than how well they invest it.

Blackstone last summer became the first member of the club to hit $1 trillion in managed assets and has set another target that would see it nearly double in size again over the next 10 years. A lot of that growth is expected to come from retail. Already one-quarter of the firm’s assets today are from individual investors.

Shelf space for private-equity funds at Merrill Lynch is as fiercely contested as shelf space in the cereal aisle at Walmart. “Wealth management firms are not going to put thousands of names on their platform. They’re going to put three in a segment, or maybe five,” Gray said at an industry conference last month. “And in almost every case, Blackstone will be one of them.”

Turning off the spigot risks losing ground to rivals and the attention of financial advisers, so firms are loath to do it.

A notable exception: HPS recently slowed its fundraising at private banks because it couldn’t find enough investments that fit its criteria. That shows commendable restraint, especially heading toward an IPO that will value the firm largely on how much money it manages. HPS declined to comment.

“Suitability” is a word you’ll hear a lot around this retail land grab. Conventional wisdom says that riskier investments only work for people who can afford to lose it all; Bloomberg’s Matt Levine calls it “earning the right to get swindled.” But even millionaires can be irrational. And retail investors, no matter how rich, tend to run for the exits in a downturn. The question is whether any amount of investor education and disclosure can turn a big-boy product into a small-fry one without serious problems.

“It’s all about how much illiquidity can you suffer to get that sort of a return,” Goldman Sachs President John Waldron said in April at Semafor’s World Economy Summit. “For the $500,000 or $1 million [net worth] person, that’s obviously harder. That’s the trade-off that constantly needs to be judged.”

“We’re not waiting for the all-clear sign to invest,” Gray said in April. He was talking about a muddying outlook for interest rates and economic growth, but it’s also a core bit of the DNA at Blackstone, which has never minded being early, as long as it’s right. The rise of retail in private markets is inevitable and there is likely a significant first-mover advantage in laying the distribution pipes, cozying up to advisers, and — and this is key — making money for investors, all of which Blackstone has done ahead of rivals.

When he ran the SEC under President Donald Trump, Clayton tried to change those rules to let more plebeians behind the velvet rope. He succeeded only marginally, but has continued to stress the absurdity of putting retirement assets that won’t be touched for decades into easily traded stocks and bonds instead of more profitable, but less liquid, bets.

“You’re paying for liquidity that you don’t need and can’t access,” he said last year. “Capital formation these days largely comes from outside the public markets, yet the investing public is largely held outside those private markets.”