CG - Blackstone's Winning Formula: Blending Growth With Stability For Investors

2024-01-02 00:41:30 ET

Summary

• Blackstone Inc. has exhibited robust performance and strong positioning for future growth, reflected in a 43% increase in its stock value since October.
• The company's assets under management have shown remarkable growth, particularly in Q3 2023, with an influx of over $25 billion.
• Blackstone is strategically positioned to benefit from potential interest rate cuts, which will lower borrowing costs and enhance deal-making opportunities in the private equity sector.

Blackstone Inc. ( BX ), a premier manager of alternative assets, has been exhibiting robust performance, underscored by its diverse investment portfolio encompassing private equity, real estate, credit, and hedge funds. The firm's consistent delivery of substantial returns for its investors underscores its strong positioning for future growth. This has been reflected in the recent surge in its stock value, which has climbed an impressive 43% since its six-month low in October.

The company's assets under management ((AUM)) have shown remarkable growth, particularly notable in Q3 2023 with an influx of over $25 billion, marking a 10% annual increase in AUM from new inflows. This growth is particularly significant given the prevailing sluggish macroeconomic conditions. Blackstone's strategic emphasis on Perpetual Capital, an innovative fund structure designed for long-term investment, has facilitated significant expansion in this area.

Concerns regarding fund withdrawal limitations at BREIT have proven to be exaggerated, reinforcing the outlook for Blackstone's enduring success. The company's trajectory is likely to be sustained by the growing appetite for alternative assets, its commitment to diversification, and its focus on generating long-term investor value. Blackstone's continuous recruitment of top-tier talent further cements its position as a leader in the field. However, while I firmly believe in the company for the long run, based on the recent surge of the stock it is priced more fairly against its fair value, and hence I lower my rating for the stock to "Buy" from "Strong Buy".

Rate Cut Impact on Blackstone's Market Moves

Blackstone has showcased extraordinary resilience and strategic acumen in the third quarter of the financial year, navigating through challenging market landscapes. Their astute sector selections have culminated in robust performances, consistently outperforming public benchmarks across the majority of their flagship strategies. This performance is underscored by their successful capital raise of over $25 billion, reflecting investor confidence in their approach.

As the Federal Reserve signals a potential shift in monetary policy with interest rate cuts in 2024, Blackstone is strategically positioned to reap substantial benefits. Such a decrease in interest rates is poised to lower borrowing costs, fostering a conducive environment for private equity transactions. This will invigorate the deal-making sphere, particularly enhancing the dynamics of the exit market through mergers and acquisitions (M&A) and initial public offerings (IPOs). For a firm like Blackstone, this is an opportunity to optimize its significant 'dry powder'—a record $200 billion in unallocated capital—effectively leveraging market dislocations. As you can see below the development of the stock price shows an inverse pattern compared to the yield for 10-Year treasury bonds, suggesting further appreciation in the stock once the expected rate cuts become a reality.

This period presents a potentially transformative era for Blackstone, enabling it to bolster its valuation and enhance returns for its investors. The combination of a favorable interest rate landscape and Blackstone's strategic prowess in capital deployment could lead to a significant augmentation in its market positioning and financial fortitude, solidifying its status as a bastion of stability and growth in the alternative investment domain.

The PE-Market - Next Golden Age?

Ultimately, my firm conviction for Blackstone stems from a general belief in the private equity industry, including the likes of KKR ( KKR ), Carlyle ( CG ), Apollo ( APO ), to name just a few, which I have covered in a market outlook, proclaiming the next golden age for private equity . Assets under management in the private equity sector have seen a significant uptick in recent years, thanks partly to strong stock performance and the distributable income generated through the industry's 2/20 fee structure. However, a closer examination of the data reveals a more nuanced picture.

As the economy faces the possibility of a recession and valuations drop, experts see this as an opportunity for private equity funds to invest at lower prices and potentially reap substantial rewards in the future when market sentiment improves. Many private equity funds have yet to deploy a significant portion of their assets, known as "dry powder," raised during strong market conditions in 2021. Therefore, I expect investors equipped with a long breath and the patience to sit out bad cycles of the economy to see this investment cycle pan out and reap hefty rewards once market sentiment lightens. In the meantime, lower valuations should be taken advantage of, bearing in mind that valuations could drop further in line with the economic sentiment. It makes sense to dollar-average over the next 12–18 months.

The Blackstone Factor

Blackstone is considered the premier private equity firm in the industry and has a strong track record of generating returns for its investors. Some reasons why Blackstone's stock is considered superior to other private equity firms include the following:

1. Diversified business model: Blackstone's diversified portfolio of businesses and investments across multiple asset classes, including private equity, real estate, credit, and hedge funds. This diversification helps to mitigate risk and provides a steady stream of income.
2. Strong track record: Blackstone has a strong record of generating returns for its investors. The firm has been in business for over 30 years and has a history of successfully executing its investment strategies.
3. Experienced management team: Blackstone is led by experienced and successful investment professionals, including co-founders Stephen Schwarzman and Peter Peterson.
4. Strong liquidity: Blackstone has a strong liquidity position, with a large number of assets under management and a solid balance sheet.
5. Strong brand: Blackstone has a strong brand and reputation in the industry, which can help it to attract top talent and secure attractive investment opportunities.

Overall, these factors help make Blackstone's stock a desirable investment option for those seeking exposure to the private equity industry.

Valuation

The recent surge in Blackstone's stock has brought the valuation closer to fair value considering current market conditions. As is typical for private companies, its earnings vary with macroeconomic cycles, meaning its P/E value in market downtimes will appear significantly too high and in boom times it appears significantly undervalued. TTM P/E for Blackstone is at 55, however its forward P/E is already projected to lower to 34 over the next 12 months. I expect the price to earnings ratio to decline over the next 12 months based on my conviction of improving exit conditions.

Blackstone's most recent quarterly results also suggest that the company's business continues to perform well, with total assets under management growing by 16% year-over-year. The company has also continued to invest aggressively, deploying $61.4 billion in the past 12 months ending Q3 2023, continuing to take advantage of lower valuations. This is a sign of Blackstone's ability to identify and capitalize on attractive investment opportunities, and it supports the view that the company's business is well-positioned for the future.

Risks

In the intricate landscape of private equity, firms like Blackstone are increasingly navigating a maze of regulatory risks, pivotal to their operational and financial wellbeing. These complexities are particularly pronounced in periods of economic upheaval, where intensified government oversight can result in augmented operational costs and procedural burdens. The regulatory environment also extends to industry-specific nuances, as investments made by firms such as Blackstone often require thorough regulatory clearances, adding layers of uncertainty and potential delays to acquisition processes. Additionally, Blackstone's dependence on debt financing introduces another dimension of regulatory scrutiny, given the stringent norms that govern financial borrowing and lending. For astute investors, a deep understanding of these regulatory intricacies is essential. This understanding should be balanced against an evaluation of the firm’s historic performance, financial robustness, and the caliber of its management team, to make well-informed decisions in the dynamic private equity sector.

Conclusion

In conclusion, Blackstone is the leading alternative asset manager with a diversified portfolio of investments across private equity, real estate, credit, and hedge funds. The company's strong track record of delivering solid returns for its investors and its premier position in the PE industry paired to make it a compelling investment. However, in light of the recent surge of the stock price investors should thoroughly track the valuation against business developments over the coming months. Overall, Blackstone's strong track record diversified portfolio, and focus on creating long-term value for investors make it a compelling investment opportunity in the private equity market.

For further details see: