Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Blackstone Group LP is treading a path others dare not. 

The Stephen Schwarzman-led firm announced on Thursday that it would acquire Harvest Fund Advisors LLC, an investment firm that specializes in master limited partnerships, or MLPs. These tax-advantaged vehicles generally own energy-related infrastructure assets such as pipelines and, as my colleague Liam Denning recently pointed out, have become puppets of oil prices.

The hesitance of investors to pile back into such stocks has confounded some Wall Street analysts, with Raymond James publishing a note earlier this month titled "Why is the market mispricing midstream stocks & which are most undervalued?" Translation: Why aren't you all buying MLPs?

Blackstone isn't acquiring Harvest simply to increase its funds under management; the deal adds a little more than $10 billion to the New York firm's total of $371 billion. The picture is bigger: It's gaining a foothold in an unloved corner of the energy sector by backing a team with a long track record and relationships that it can't easily create from scratch. 

It also doesn't hurt that those relationships are with institutions such as pension funds that may be open to investing alongside Blackstone in the shale and pipeline sectors, where it has already deployed billions of dollars.

Heavyweights
Harvest Fund Advisors' 10 largest positions make up about 61 percent of its holdings
Source: Bloomberg

Notably, the contrarian deal comes as one of Harvest's larger rivals, Tortoise Capital Advisors, explores the sale of a majority stake in itself. The fact that MLPs make up only about 60 percent of the firm's activities may explain why it was less appealing to Blackstone.

Front Foot
Over the past 18 months, master limited partnerships' fund flows have been dominated by active managers such as Harvest
Source: Barclays

Nevertheless, as long as its competitors maintain their distance from the sector, Blackstone can use their absence to quickly expand its newest business. As I've written, such alternative asset managers have a loaded bench of captive investors that are willing to reach into their deep pockets and bet on new strategies, especially for firms with which they're comfortable.  

Fearless
Blackstone's decision to purchase an MLP investor comes at a trying time for the sector
Source: Bloomberg

By identifying and filling in blank space -- even if the timing seems off -- Blackstone is putting itself in a strong position to widen its advantage over competitors. As the poem goes, taking the road less traveled can make all the difference.

Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Remember that in 2015, Ares Management LP scrapped a merger with rival Kayne Anderson. The two cited poor conditions in the then-combusting energy sector, but the speculation was that Ares no longer had the appetite for the potential earnings decline that it could inherit from what would be a new, outsize exposure to MLPs.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net