What do Private Equity investors look for? Blackstone's playbook

What do sandwich shops, space launches, and artificial intelligence have in common?

In this conversation, Viral Patel, sits down with Courtney Reagan, Senior Editor of Blackstone Insights to break down how Blackstone approaches investing — and why very different businesses can belong together.

At its core it’s a simple idea: investing behind long-term, durable trends that are shaping the global economy. From the innovators reshaping industries with AI and advanced technologies to everyday consumer experiences like sports and coffee, this discussion highlights how a thematic approach can help build resilient portfolios across market cycles.

Transcript

Courtney Reagan - While Blackstone has expanded markedly from its beginnings of a private equity shop, it's still very much in its DNA. There are more than 270 companies in its portfolio, but they're brought together in a thoughtful way. So how do then subs and satellites fit together in a portfolio? Viral Patel is here to explain it. So I guess let's start with that opening question. How do subs and satellites go together?

Viral Patel - It's a great question because you're right on the surface, you think about subs, you think about satellites and you go, why would you put these things together? But the reality is if you look at why we are investing in any one company, you can see what the connectivity is. And really what drives these things together is this desire that we have to invest behind long-term secular and durable tailwinds.

Courtney - So when you're looking to evaluate a possible investment, what characteristics are you looking for if the business models themselves can be so different?

Viral - Yeah. I mean, look, I think it starts again with thematically. What do we really like thematically? Do we think this is a good neighbourhood for us to invest in behind? But then to your point, you do have to go a level deeper and say, what is it about this company that makes it special? One of the things that we really ask ourselves quite a bit is, how important is this business? If this business were to go away tomorrow, would its customers care?

Courtney - So you talked about thematics and there are some big themes that run throughout the portfolio. I feel like we have to start a little bit with AI. In general, what is Blackstone looking for when you're looking at an investment that is tied to AI?

Viral - So when we think about AI, you really have to think about it as a theme that impacts everything from the actual infrastructure that enables AI to happen to the energy that powers it and then the actual AI companies themselves at the application layer. Maybe let's start at the application layer because that tends to be maybe the most exciting side of things. So companies like OpenAI, companies like Anthropic. When we first made our investments into these companies last year, we were thinking a lot about a few things. One, this is an incredibly disruptive technology that has the potential to permeate huge, huge parts of the economy. And if you think about any technological cycle that we've had over the last 20, 30 years, whether that's internet, mobile, cloud, the application side is when you've created the most amount of value. And so we like the idea of having exposure to that big long tailwind.

OpenAI was a little bit more of a bet on consumer adoption, right? One of the fastest companies to get adoption as an app ever. And then Anthropic was a little bit more of a bet on enterprise adoption of AI. And interestingly for us, some of our best relationships with these companies didn't necessarily start on the private equity side or even the growth side, actually started on the real estate side.

Courtney - Ok, how? What do you mean?

Viral - All of these companies need compute, right? In order for OpenAI, for Anthropic to deliver AI to all of us, you actually need compute capacity and that sits in data centres. And so given that we are such a large owner and developer of data centres, that was a relationship that we were able to lean on to really build connectivity with both of these companies.

Courtney - And then that brings it back to sort of a physical investment thesis too.

Viral - Absolutely.

Courtney - That's really interesting. So then there are other investments that AI maybe doesn't replicate, but could improve. What are some of those examples?

Viral - A few different ways to kind of think about that. So yes, we own a lot of data centres, but the amount of data centre growth that is happening means the services economy around that is growing very, very quickly. And so companies that are providing power to data centres, electrical services, cooling, server, storage, any of those components are growing very quickly in today's market. So for example, we own a company called Air Control. It's a simple HVAC business. And what's really interesting about that is HVAC is typically a GDP, GDP plus type grower. So not that exciting, but this business really had very little data centre capacity before we invested in them. And so we were able to help them make introductions into the data centre community, whether it's our data centres or others. And today, a substantial portion of the earnings of that business are actually coming from data centres.

So now you actually have this environment where a very simple HVAC heating and cooling business all of a sudden is incorporating AI into it through a new revenue line that it never had before.

Courtney - All right. So let's go from the fundamentals of infrastructure to the future, thinking bigger. Can you talk about SpaceX?

Viral - Yeah. Look, that's one of the more fun ones and it was certainly a fun discussion at Investment Committee to kind of talk through. But again, this goes back to the idea that we want to invest behind long-term durable sector tailwinds. And one of the things that we believe is that if you look out over the next 10, 15, 20 years, commercial activity and space is going to increase at a pretty significant pace. And we think it's the type of business that other businesses are going to be built on top of it. Starlink, which sits within SpaceX is kind of the first example of that. But over time, there's going to be a number of different businesses that people are going to think about doing that are going to use SpaceX rockets to get there.

Courtney - I mean, to think about investing in commercial activity and space is fairly mind-blowing and a really exciting area to talk about. We've talked about AI, we've talked about infrastructure, we've gone to space, but let's come back down to earth. Everybody's got to eat and we like franchisors sort of for that very fundamental reason. So from the future to fundamentals, let's talk about that.

Viral - When you think about our franchisor investments, a few things. We own several. I mean, go back to 2007 when we first bought Hilton, but today Jersey Mike's, Seven Brew Coffee, Tropical Smoothie Cafe. We like these business models for a few reasons. If you find the right concept with enough white space growth and you can open enough stores, they can be tremendously high growth. And importantly, a franchisor gets a royalty on system-wide sales. So we're not actually the ones opening the stores. There's a franchisee that goes out, they open the stores, they spend the capital, they hire the people. We get a percentage of revenues off of the top. So we're responsible for the marketing, for the brand, for the formula, for the recipe, a supply chain, but we're not actually opening it. So that means you can have high growth, you mean high margins, you can have high free cash flow.

So all of those words are really wonderful for a private equity person. We are active owners, but we're not active managers. We help our companies, we bring the resources to these businesses in order to help them accelerate their growth. So that's a good example in Jersey Mike's of something that we're able to take a business that looks like one and really accelerate it going forward. Seven Brew Coffee is another example of it. A little slightly different playbook in that Jersey Mike's is a much more established franchise, 3,000 stores. Seven Brew Coffee, much, much earlier stage. This was actually more of a growth investment than a private equity investment. Same business model, right franchisor business model, but with a much smaller a store count. But this also played a little bit on this idea of live experiences. You can make an endless number of combinations of drinks. My daughter would have a field day there, but it is a real experiential thing in terms of how you actually get your coffee or your drink there.

And that has done incredibly, incredibly well. If you go google Seven Brew Coffee right now, you'll have all these articles about Seven Brew popping up in towns and they're just being like traffic jams. The real key to these things is it needs a slightly different playbook than Jersey Mike's does, right? Slightly different playbook, but same idea behind a great brand that's doing incredibly well with consumers, plays on this live experience. The other thing we like is how we can actually help them. We are one of the world's largest real estate investors and site selection is an incredibly important part of how one thinks about where you open your new stores. And for us, we've really tried to apply AI to drive that. Apply AI, apply data science to drive that site selection. We can sit with our data science team and then they can run their models and then map that across different locations across the United States, right?

And out of that can give you a much better sense of, well, you know what? If we open a store here, it has a better chance of having strong unit sales, higher sales velocity. And so it's those sorts of things that we love to be able to do, bring our AI and our data science capabilities to help our companies drive faster. So again, really strong fundamentals in franchisors. We love the business models, but we also love what we can do with them.

Courtney - And yeah, you can take the insights that you have as a part of this business and then apply it across the board. That's fascinating. But then what about sports? Cricket? What in the world does that have to do with portfolio construction?

Viral - Cricket provides a few things. One, sports investments are really lower correlated assets. We're looking for investments that will have less correlation to macroeconomic factors, less focused on GDP, less focused on inflation. As a society, we continue to spend more of our dollars on these live experiences. So sports fits a little bit of that theme from a portfolio construction perspective, but it also is part of a broader theme of investing behind India, right? It's been one of our best performing equity markets globally for us in the last five, six years.

Courtney - And then also just digging into that a little deeper with India, you've talked about how the sports landscape for broadcast is a little less developed there than here, but there's opportunity for that as well.

Viral - Absolutely. So the media rights in India are just at an earlier stage of their development than you see in the United States or even in Europe. Interesting stat, if you look at the opening match of the IPL this year, which is the league that our cricket team sits within, it had 400 million more viewers than the Super Bowl did. The media rights we believe have the potential to really increase over time. And that's both with broadcast rights, but also on the streaming platform. So as that goes in, we think there's an ability for a little bit more appreciation in those media rights.

Courtney - And that brings us back sort of to that timing point when you're constructing a portfolio. So just making sure I understand, when we're looking at our 270 company portfolio here at Blackstone, there are connecting themes throughout, but there are also reasons why one investment makes sense against another. So we're investing in the future of AI in a number of ways, but we're also looking at the infrastructure that powers AI that supports it, but then there's also things that maybe AI can't touch like a cricket team or Seven Brew Coffee. And so all of that sort of fits together in some ways, but also complimentary in others. Is that right?

Viral - That's a great way to think about it. We try to think of our portfolio construction here at the firm as being really holistic, right? We're trying to diversify our exposure across a lot of different areas. We don't want to overconcentrate in any one thing. So even though we believe AI is a big tailwind that we want to invest meaningful dollars behind, we want to do that in a way where we're investing in multiple different sectors that are tied to AI, not just one way of playing it. And so those investments can play off of one another. That's really the key to the portfolio construction.

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