Blackstone Gives Investors Continuity, Whether They Wanted It or Not

Blackstone may think of itself as a disruptive investor, but its approach to succession planning is anything but. The giant alternative-investment manager named the head of its real estate business, Jon Gray, as its day-to-day manager on Tuesday, shunting Tony James into a vice chairman role. Big questions — like whether to remain a partnership — will still sit with the chief executive and co-founder, Steve Schwarzman. Blackstone isn’t run for outsiders’ benefit, and the gradual approach to change shows it.

Mr. Gray has only ever worked for Blackstone. He joined it as an analyst straight out of the University of Pennsylvania’s Wharton School nearly 26 years ago, when the firm had fewer than 100 employees managing under $4 billion in assets. He built the firm’s real estate business with deals like the $39 billion buyout of Equity Office Properties in 2007. Today Mr. Gray’s division manages more than a quarter of the firm’s $434 billion in assets and generated roughly half of its $3.4 billion in earnings last year.

His formal elevation eliminates leadership uncertainty at the firm — no small issue given that Mr. James just hit 67 and Mr. Schwarzman turns 71 on Wednesday — while having little impact on daily operations. As a 10-year veteran of the management committee, Mr. Gray has had a say in all major investment decisions. And he’ll still need Mr. Schwarzman’s approval for any fresh initiatives.

Blackstone is following in the footsteps of rivals Carlyle and Kohlberg Kravis Roberts, each of which in recent months designated two rising stars as day-to-day bosses and eventual successors to the founders. It’s an unusually drawn-out process for public companies, and underscores that these are still partnerships run primarily for the benefit of general and limited partners, where holders of shares, or units, have limited rights. Blackstone’s stock has produced a modest 105 percent total return since the company’s 2007 initial public offering, trailing the Standard & Poor’s 500-stock index by more than 20 percentage points.

Mr. Gray’s promotion offers no clue about whether Blackstone will take advantage of the recent United States tax cuts and convert into a corporation. Such a change might win the stock a higher valuation from investors — since limited partnerships remain off limits to some investors — but the firm would have to pay corporate tax at a rate most likely in the midteens. That’s for Mr. Schwarzman and Mr. Gray to mull at a later date. Until then, investors get continuity, whether they wanted it or not.