BX - Why We Prefer Brookfield Asset Management Over Blackstone

2023-03-13 14:33:44 ET

Summary

• Blackstone Inc. and Brookfield Asset Management are two leading asset managers with attractive economics in the alternative investments industry, which is expected to grow to $23 trillion by 2026.
• Brookfield has a strategy centered around the mega-trends of decarbonization and digitization, while Blackstone has a much higher concentration of fee-earning assets under management in real estate.
• While Brookfield Asset Management is trading at a higher p/e multiple, we believe the premium valuation to be justified.

Two of the leading asset managers in the world are Blackstone Inc. ( BX ) and Brookfield Asset Management Ltd. ( BAM ). They are both great businesses with terrific economics operating in an attractive industry that looks set to grow for many more years. Both companies manage portfolios of real estate, infrastructure, private equity, and other alternative assets. Blackstone is the bigger of the two, with almost twice the market cap. While BAM has a market cap of ~$52 billion, Blackstone's is considerably higher at ~$94 billion. Still, the valuation is relatively similar for both companies, and the reason why we prefer Brookfield over Blackstone has more to do with the company's qualitative characteristics and strategy, more than valuation differences.

We particularly like that Brookfield's strategy is centered around the strong mega-trends of decarbonization and digitization of the economy, and in general has a longer-term investment horizon compared to Blackstone. In fact, a high percentage of Brookfield's assets under management ("AUM") is linked to public entities such as Brookfield Renewables ( BEP ), Brookfield Infrastructure ( BIP ), and Brookfield Business Partners ( BBU ).

That is not to say that Blackstone does not hold some investment for very long periods, or that it does not have a perpetual capital strategy. Blackstone has roughly $314 billion in fee-earning perpetual capital AUM, or approximately 44% of its ~$718 billion in fee-earning AUM. The image below shows some of Blackstone's perpetual capital strategies. Still, an impressive ~83% of Brookfield's fee-bearing capital is either long-term or permanent.

Attractive Industry

Both companies benefit from operating in a very attractive industry, characterized by high profit margins and strong growth. BAM and BX further benefit from scale advantages, and capital gravitating towards the larger and more diverse managers. They also have a competitive moat resulting from the high switching costs for customers. Once a customer commits capital with one of these companies, they have a sunk cost in the form of time spent in building the relationship and performing due diligence, which means they are less likely to switch to a competitor just because they offer slightly lower fees.

Finally, both companies also benefit from having strong brands that give their customers peace of mind when investing. The AUM for alternative investments is expected to grow to ~$23 trillion by 2026, from ~$4 trillion in 2010, or roughly an 11% CAGR.

Assets Under Management

Brookfield has ~$800 billion of AUM, with about $418 billion of it being fee-bearing capital that grew ~15% over the past year. At the current share price, you are basically getting ~$8 of fee-bearing capital per dollar invested. The distribution by asset class for the fee-bearing AUM is shown below, as can be seen there is good diversification among the different strategies.

For its part Blackstone has ~$975 billion of AUM, with about $718 billion of it being fee-earning AUM that grew ~11% y/y. At the current share price you are basically getting ~$7.6 of fee-earning AUM per dollar invested. One thing we do not like about Blackstone's fee-earning AUM distribution is the high concentration in real estate.

Dry Powder

Brookfield and Blackstone are well-positioned to take advantage of potential opportunities should there be dislocation in financial markets. Brookfield has ~$87 billion in uncalled commitments, with ~$40 billion of this committed capital not currently earning fees, and which should result in ~$400 million of future fee-earning revenue.

For its part, Blackstone has ~$187 billion of dry powder available, most of it assigned to private equity strategies, and most of the rest targeted at real estate investments. We prefer Brookfield's more diversified strategy, especially because that widens the opportunity field.

Balance Sheets

Both companies have pristine balance sheets, with Brookfield Asset Management having basically zero long-term debt and ~$3 billion in cash and financial assets. For its part, Blackstone has roughly $11 billion in outstanding debt, and ~$18 billion in cash and net investments.

Dividend

Brookfield has a very generous dividend policy where it targets a 90%+ payout ratio. Its most recently announced quarterly dividend was for $0.32 per share, which annualized would represent a ~4% dividend yield at current prices. Blackstone has a higher dividend yield, currently ~5.4%, but it is quite lumpy, as its distributable earnings are highly dependent on exiting investments at a profit. Blackstone's dividend policy is to pay a quarterly dividend representing approximately 85% of Blackstone’s share of distributable earnings. The table below shows how the dividend has varied the last few quarters, with the most recent one being for $0.91, down considerably from the $1.45 a year earlier.

ESG

We believe Brookfield has stronger ESG credentials given its strong commitment to investing in renewable energy and its focus on sustainability in its real estate investments, with a goal of reducing the carbon footprint of its properties. Blackstone has also made some investments in renewable energy, but we have the impression that the firm is not as focused on sustainability as Brookfield.

Valuation

In our opinion Brookfield Asset Management deserves a higher earnings multiple compared to Blackstone, given its asset light strategy and faster fee-bearing AUM growth. At current prices BAM's price to fee-related earnings is ~24.5x, and its price to distributable earnings is roughly 24.7x. Blackstone is trading with cheaper multiples, given that its price to fee-related earnings is ~21.9x and price to distributable earnings is ~15.5x.

As we mentioned previously, at current prices you get slightly more fee-bearing AUM per dollar invested with Brookfield than you get with Blackstone. It is also worth remembering that a very high percentage of Brookfield's fee-bearing AUM is either long-term or permanent, and that it is growing faster. We also like that Brookfield has more exposure to the rapidly growing renewable energy and infrastructure sectors, while Blackstone is more focused in the more traditional real estate and private equity sectors. For these reasons we prefer Brookfield over Blackstone, even though Blackstone trades at a lower p/e.

Risks

Both companies are very reliant on their brands, and a scandal would tarnish their reputations and lead to significant investment outflows. There is also a risk that they might fail to generate investment returns close to what investors are expecting, which could also lead to AUM declines, which in turn would significantly affect their share prices. There is also no guarantee that the current rapid growth in alternatives will continue.

Conclusion

The alternatives asset management industry is quite attractive, and two of the leaders are Blackstone and Brookfield Asset Management. They are both growing rapidly, but with slightly different strategies. We prefer Brookfield's more diversified strategy, which has a significant weight in the renewable energy and infrastructure sectors. In our opinion, Blackstone is too concentrated in real estate and private equity, two sectors that we believe will benefit less from current mega-trends. While Brookfield's valuation looks a bit more expensive, we believe it is more than justified by its faster fee-bearing AUM growth.

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