Blackstone’s Korngold warns of tech sector euphoria
Jon Korngold, the head of Blackstone Growth, discusses how a distortion in the amount of capital currently chasing investments could influence deal making in the coming year
It’s been a busy year for Blackstone Growth’s team, which is led by the private-equity firm’s global co-head of technology investments Jon Korngold. The growth unit in November acquired iconic womenswear brand Spanx Inc. And just before the Christmas holiday, the unit announced it is taking a majority stake in skin care brand Supergoop! Mr. Korngold spoke to WSJ Pro Private Equity about the continued digitization of the global economy, “a blind euphoria" among investors in certain tech sectors and how inflation and the new Omicron variant could affect investors in the year ahead. Here are a few edited excerpts.
WSJ Pro: What most surprised you about 2021?
Mr. Korngold: I think you’re seeing a digitization of the economy coming out of the Covid-19 pandemic. In many ways we leapfrogged five to 10 years. People are ordering groceries online, visiting doctors using telemedicine and using e-commerce more than ever before. You’ve seen a combination of low interest rates, stimulus and globally coordinated monetary policy—this was necessary to combat Covid’s impact on the economy, but this has also led to a supply/demand distortion of capital and [widespread] participation in the equity markets. A lot of capital has been flooded into the market. Now, too many companies are being valued as ‘world-class’ companies, but not all companies are ‘world-class’ companies. Fortunately, we’re sector experts, not generalists, and have invested across cycles, so we are able to better distinguish among the potential winners. As we enter 2022, we shouldn’t lose sight of the fact that there remains a distortion in the amount of capital in the market chasing after companies. But this remains an exciting period of unprecedented innovation.
WSJ Pro: What were the major takeaways from technology investing in 2021?
Mr. Korngold: There’s no part of our economy that doesn’t have tech enablement. The end market is growing exponentially—and I’m not just talking about enterprise software—it’s e-commerce, telemedicine, supply chain, new ways of financial tech and financial banking.
Now, because the world is so fully priced, it’s no longer finding a winner, it’s making a winner. At Blackstone Growth, we believe the only way to create consistent value across cycles is to focus on operational acumen as opposed to a more passive, momentum-based approach that might work well in a sustained bull market.
You also see a lot of valuation models for certain parts of tech that I would argue suspend reality a bit. [There’s] an influx of capital from nontraditional financial services investors, for instance, which haven’t lived through cycles [or have an] appreciation of being burned over time.
The positive of all that is more innovation. I do think the more capital that comes into an area the more innovation we will see.
WSJ Pro: What concerns you as we head into 2022?
Mr. Korngold: In some areas there’s been a blind euphoria, in some huge swaths of the tech industry. Hopefully there is more rationality—the market hates uncertainty. The Omicron variant and the speed of its spreading adds uncertainty. We’re in an environment where we have a much better handle on science, vaccines, and we understand how to deal with this, so it’s not as much a political or social will to shut down the economy again.
A second concern is inflation. We’ve been seeing [inflation] data across our broader portfolio. Some is fundamentally driven and some is distortion from government stimulus. When wages and rents increase, those tend to be very sticky. We can talk about [a one-off] surge in pricing or the supply chain, but wages and energy and labor shortages and rents persist a bit longer.
For massively profitable businesses in a low interest environment, people look the other way. When rates rise, as they inevitably will, the market will apply a higher discount rate to the losses and they are at risk of having significant multiple compression. Businesses that are generally profitable will have less compression than those hemorrhaging. At some point, you’ll start to see the market vote with its feet a bit.
