Business Strategy & Outlook:
Blackstone has built a solid position in the alternative asset-management industry, utilizing its reputation, broad product portfolio, investment performance track record and cadre of dedicated professionals to not only raise massive amounts of capital but maintain the reputation it has built for itself as a “go-to firm” for institutional and high-net-worth investors looking for exposure to alternative assets. Unlike the more traditional asset managers, who have had to rely on investor inaction (driven by either good fund performance or investor inertia/uncertainty) to keep annual redemption rates low, the products offered by alternative asset managers can have lockup periods attached to them, which prevent investors from redeeming part or all of their investment for a prolonged period of time.
Blackstone is one of the world’s largest alternative asset managers with $880.9 billion in total assets under management, including $650.0 billion in fee-earning assets under management, at the end of 2021. The company’s portfolio is broadly diversified across four business segments–private equity (24% of fee-earning AUM and 32% of base management fees), real estate (34% and 39%), credit & insurance (30% and 16%), and hedge fund solutions (11% and 13%) –and it primarily serves clients in the institutional channel. With customer demand for alternatives increasing, and investors in alternative assets attempting to limit the number of providers they use, large-scale players like Blackstone are well positioned to gather and retain assets for their funds. That said, investors in Blackstone are betting that the company’s outstanding investment track record and fundraising capabilities will continue into the future. While the confidence in the firm’s ability to earn excess returns over the next 10 years, it will become increasingly difficult for the company to do so longer-term as increased competition from peers (including more traditional asset managers like BlackRock), continued pressure on fees, and a general maturation of the segment (from a solid period of above average growth due to shifting investor demand for alternatives) weigh on results.
Financial Strengths:
Blackstone’s business model depends heavily on having fully functioning credit and equity markets that will allow its investment funds to not only arrange financing for leveraged buyouts and/or additional debt issuances for the companies and properties it oversees but cash out of them once their investment has run its course. While the company saved itself a lot of headaches during the collapse of the credit and equity markets during the 2008-09 financial crisis by having relatively little debt on its own books, debt levels crept up to less-than-ideal levels during 2010-19. Given that asset managers like Blackstone have a high degree of revenue cyclicality and operating leverage, and are generally asset light, they should not maintain more than low to moderate levels of financial leverage.
The company entered 2022 with $7.6 billion in longer-term debt (on a principal basis) on its books, with 60% of that total coming due during 2030-50. The company also has a $2.25 billion revolving credit facility (which expires in November 2025) but had no outstanding balances at the end of January 2022. Blackstone should enter 2023 with a debt/total capital ratio of 44%, debt/EBITDA (by our calculations) at 1.1 times, and interest coverage of more than 30 times. On the distribution front, share repurchases have been rare over the past decade, with the company repurchasing (net of issuances) just over $3 billion of stock (most of which was bought back in the past four calendar years). Dividend payments, meanwhile, exceeded $25 billion during 2012-21 and are expected to account for 85% of distributable earnings annually going forward.
Bulls Say:
- Blackstone, with $650 billion in fee-earning AUM at the end of 2021, is a “go-to firm” for institutional and high-net-worth investors looking for exposure to alternative assets.
- The company’s ever-increasing scale, diversified product offerings, long track record of investment performance and strong client relationships position the firm to perform well in a variety of market conditions.
- Customer demand for alternatives has been increasing, with institutional investors in the category limiting the number of providers they use—both positives for Blackstone’s business model.
Company Description:
Blackstone is one of the world’s largest alternative asset managers with $880.9 billion in total asset under management, including $650.0 billion in fee-earning asset under management, at the end of 2021. The company has four core business segments: private equity (24% of fee-earning AUM, and 32% of base management fees, during 2021); real estate (34% and 39%); credit & insurance (30% and 16%); and hedge fund solutions (12% and 13%). While the firm primarily serves institutional investors (87% of AUM), it does serve clients in the high-net-worth channel (13%). Blackstone operates through 25 offices located in the Americas (8), Europe and the Middle East (9), and the Asia-Pacific region (8).
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.