Q&A: Joe Baratta on Technology, ESG, and Today’s Investment Opportunities
One year since the onset of the COVID-19 pandemic, investors face a new set of challenges and opportunities. We sat down with Global Head of Private Equity Joe Baratta to learn more about how Blackstone is navigating the current environment, from identifying great businesses to building on the firm’s commitments to ESG.
Joe Baratta is the Global Head of Private Equity and a member of the firm’s Management Committee. He serves on the board of Year Up, a partner in Blackstone’s new Career Pathways Initiative.
Q: The U.S. economy is currently experiencing what many observers have called a “K-shaped” recovery, where some sectors have strongly outperformed others. Do you think this divergence will persist as the COVID-19 outlook improves?
In some areas, I think it will. COVID-19 accelerated the decline of many industries that were facing structural challenges even before the pandemic. Brick-and-mortar retail was already struggling against the rise of e-commerce; traditional media companies were finding it hard to compete with on-demand subscription services. These trends were well underway at the beginning of the pandemic, and I don’t think they’ll be reversing once it’s over.
But I also believe that our investments in hospitality, travel, and location-based entertainment – like concert venues and theme parks – remain fundamentally good businesses. Once everyone can safely return to normal, I think these areas will come back even stronger as pent-up demand from over a year of lockdowns is released.
Q: Despite the gradual pace of recovery, valuations have remained high, especially in high-growth industries. How do you find value in this kind of environment?
First, we’re looking for companies that are positioned to benefit from positive secular trends. Bumble is a great example of that. When we acquired it in 2019, the company was growing rapidly and already the number two platform in the industry. The last two years have seen that momentum continue, and Bumble has cemented itself as a market leader in the digital connections space.
It’s also about finding ways to meaningfully improve these companies. We have a Portfolio Operations group that works with management teams to help make their businesses more sustainable, help lower their costs through procurement discounts, and help them build world-class leadership teams.
Ultimately, it’s a combination of finding high-quality businesses in the right neighborhoods and being able to drive operational changes that can make these companies better.
Q: Technological innovation is one of the biggest secular trends driving growth today – but the tech investing space is also very crowded. How are you investing in that theme?
“Technology” isn’t just one industry. Almost every business today must incorporate technology into its product or service somehow. In our corporate PE business, we’re not investing in early-stage tech companies with adoption or execution risk – we’re investing in quality companies with established business models that are enabled by technology.
For example, 30 years ago Ancestry’s product was delivered on paper in binders; now it’s delivered digitally. That’s what we’re looking for: businesses that are using technology to make their customer experience better, deliver their product better, and make their operations more efficient. And it’s not just about investing in companies that are using technology in smart ways; our Portfolio Operations group has a team dedicated to digital transformation that helps our companies implement more sophisticated technology solutions, like enhanced cybersecurity tools and robust e-commerce capabilities. So, technology really is a part of everything that we’re doing.
Q: Beyond tech, where do you see the most interesting opportunities for Blackstone’s private equity business?
We try to take a long-term perspective with our investments, so many of our areas of focus are derived from megatrends we’re seeing in demographics, consumer behavior and the economy. One example of that is life sciences. We’re investing across the industry, not only in promising therapeutics through our life sciences business, but also in the services and supply chain infrastructure that deliver them to patients.
The rapid adoption of digital delivery of goods and services has also created opportunities. We’re looking at how we can participate in the explosion in demand for streaming content and the services related to content production. Additionally, growing broadband capacity demand is creating an increased need for energy and electricity, as is the growing popularity of electric vehicles. We’re especially focused on investing in renewables.
In terms of geographies, we see enormous potential in Asia, where a growing middle class is creating secular tailwinds for education services, consumer goods, and healthcare. Today, we’re one of the largest private equity investors in India, where our investments have benefitted from rapid economic growth in the country. In Japan – the world’s third-largest economy – the private equity industry is still relatively small, and we think there’s a real opportunity for firms like ours to make inroads.
Q: Switching gears – you’ve been a champion of ESG initiatives at Blackstone at a time when many firms are seeking to make a positive impact. How does Blackstone move the needle on ESG in a meaningful way?
Our business has the benefit of enormous scale, so when we implement an ESG initiative across our portfolio, that can affect over 200 companies, their nearly 500,000 employees, and the many communities across the globe where we operate. It’s hard to overstate the impact of that.
We believe that focusing on ESG can drive real value across our portfolio – for example, by helping our portfolio companies and properties become more energy-efficient. At the same time, we have an obligation to our investors – including retirement systems that represent over 31 million pensioners in the US – and the employees across our portfolio to be responsible operators who advance environmental and social progress.
Something we’re very focused on is increasing diverse representation at our portfolio companies, including at the C-suite and board level, through our board diversity and Career Pathways initiatives. We also work closely with our portfolio companies to help make their operations more sustainable and energy-efficient, and we recently announced a target of 15% carbon emissions reduction across new investments where we control energy usage. And we implement rigorous governance and due diligence processes with a company to ensure that they’re operating at the highest standards of ethics and accountability. Again, what makes this approach powerful is our ability to help effect change across such a wide range of businesses and industries. We see ESG as one of the most important ways we can drive value for our portfolio companies going forward.