Blackstone Inc. (NYSE:BX) is a leading alternative asset manager with a diversified portfolio of investments across private equity, real estate, credit, and hedge funds. The company has a strong track record of delivering solid returns for its investors and is extremely well-positioned to continue to do so in the future. Recently, shares have pulled back, providing an opportunity for investors to enter or expand a position at an attractive valuation.
The company has seen strong growth in assets under management (AUM) in recent years, in Q3 2022 alone, realizing over $45 billion of inflows, equivalent to a 20% annual AUM growth rate just from new inflows. Blackstone has also been focused on getting clients to invest in Perpetual Capital, a new type of fund structure that is more long-term oriented and avoids some issues with other private market entities, which has led to significant growth in Perpetual Capital AUM.
Recent worries about fund withdrawal limitations at BREIT are overblown, and Blackstone should do well in the long run. Overall, Blackstone’s growth will continue in the long term, driven by increased demand for alternative assets, diversification, and the company’s focus on creating long-term value for investors. Blackstone continues to hire best-in-class talent and shows no signs of slowing down. As such, on the back of some misplaced negativity around the company in the market, I will initiate my rating for Blackstone stock at “Strong Buy.”
The BREIT controversy
Without beating around the bush, first, I want to address the whole BREIT controversy and why it is ultimately overblown in its scope. The ‘Roar’ was big when Blackstone announced at the beginning of December that it would limit withdrawals to one of its flagship funds BREIT as contractually agreed upon by its limited partners. While the signaling of such an announcement is undoubtedly bad, the overreaction of a more than 20% drop in Blackstone’s stock was more than unjustified.
There are two main reasons why I sense the sell-off on the back of the news is unjustified:
However, looking closely, the imposed withdrawal limit is a reaction to what happened in the financial crisis when banks and PE funds cascaded due to fire-sale spirals. First, plenty of people argued that the withdrawals were to lead to a fire-sale of its property assets, marking a downward spiral that, once it gets going, is hard to stop. Second, the withdrawals in October and November amounted to just $3 billion, which, compared to the $11 billion in cash, are still small amounts.
Some 70% of the withdrawals can be linked back to foreign, primarily Asian investors, whose share of contributions of the fund makes up roughly 20%. Therefore, claims concerning a general loss of confidence in the fund appear farfetched, as most limited partners remain confident or even extend contributions, as is the case for the University of California, which recently invested $4 billion in the fund that popular opinion labeled as a potential Kickstarter of a new financial crisis.
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 recently 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:
- 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.
- 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.
- Experienced management team: Blackstone is led by experienced and successful investment professionals, including co-founders Stephen Schwarzman and Peter Peterson.
- Strong liquidity: Blackstone has a strong liquidity position, with a large number of assets under management and a solid balance sheet.
- 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.
The recent sell-off in Blackstone’s stock has brought valuations to attractive levels, with the company trading at a forward P/E of 14.8 and a TTM P/E of 13.1, along with a dividend yield of 6.5%. This is particularly compelling considering Blackstone’s strong track record of delivering 30% returns on equity over the past five years.
Blackstone’s most recent quarterly results also suggest that the company’s business continues to perform well, with total assets under management growing by 30% year-over-year. The company has also continued to invest aggressively, deploying $167.6 billion in the past 12 months ending Q3 2022, compared to $62.9 billion, $61.7 billion, and $144.4 billion in the years 2019, 2020, and 2021 respectively. 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.
Private equity firms are subject to various regulatory risks, which can have an impact on their operations and financial performance. These risks can have a significant impact on the operations and financial performance of private equity firms, including Blackstone.
One regulatory risk that private equity firms such as Blackstone may face is increased scrutiny or regulation by government agencies. This can occur in the wake of a financial crisis or other economic events and can lead to increased costs and burdens on operations. Additionally, Blackstone, like other private equity firms, may also be subject to regulatory risks related to the industries in which they invest. For example, a company that is the target of an acquisition by Blackstone may be subject to regulatory approval, which can be a lengthy and uncertain process. Furthermore, Blackstone, which often relies on debt financing, may also face regulatory risks related to the financing of their investments, as debt financing is subject to regulatory oversight.
It is important for investors to consider these regulatory risks when evaluating potential investments in the private equity space, particularly in firms such as Blackstone. While these risks are certainly worth considering, investors should also look at the track record of the firm, its financial performance, and its management team to make an informed investment decision.
In conclusion, Blackstone Group Inc. 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, in particular on the back of the recent pullback in the stock price, and therefore provides an opportunity for investors to enter or expand a position at an attractive valuation. Blackstone’s most recent quarterly results have shown strong growth in assets under management, which becomes apparent by the $4 billion commitment made by the University of California just two weeks ago. 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.