Blackstone Is Capitalizing On Attractive Opportunities

I last reviewed Blackstone (BX) in this July 23 post at which time it had just released its Q2 and YTD2023 results. Now that BX has released its Q3 and YTD2023 results on October 19, I take this opportunity to revisit this existing holding.

Business Overview

I encourage you to review the company's website and Part 1 of the FY2022 10-K.

The 'Our Businesses' section of BX's website has a menu of the areas in which BX invests. Over the years, it has established an unparalleled global platform of leading business lines, offering over 70 distinct investment strategies.

BX has surpassed the $1T level in total Assets Under Management (AUM) and reached this level more than 3 years ahead of the aspirational road map presented at the 2018 Investor Day (see presentation).

In July 2023, PwC released the findings of its '2023 Global Asset and Wealth Management Survey' in which it is estimated that 1 in 6 asset and wealth management companies globally are likely to disappear or be acquired by 2027; this is twice the normal turnover rate.

The survey of 250 asset managers and 250 institutional investors paints the picture of an industry grappling with a set of challenges:

• digital transformation;
• shifting investor expectations; and
• consolidation.

As a result, 73% of asset managers are considering a strategic consolidation with another asset manager in the coming months to:

• gain access to new segments;
• build market share; and
• mitigate risks.

BX is likely to benefit from this industry consolidation which makes some investors wonder when BX's AUM will reach the $2T level. Therein lies the 'trillion-dollar question'.

Financials

Q3 and YTD2023 Results

The most recent results are accessible here and in the accompanying Q3 2023 Supplemental Financial Data. In particular, refer to pages 18 and 19 which reflect a high-level overview of the various funds BX manages. I am unable to ascertain what are the underlying assets in each fund.

The scarcity of IPOs and M&A activity has led to a ~68% decline in net realizations (~$0.851B YTD2023 versus ~$2.677B in YTD2022). This has contributed to a ~31% decline in YTD distributable earnings relative to the same period in FY2022. This decline means BX cannot recycle as much money back into funds.

Despite a challenging environment, BX has several opportunities in which it can capitalize on these challenges. In this interview, Jon Gray, BX's President and COO discusses the firm's quarterly earnings results and the state of commercial real estate and housing market at large.

BX has a diverse range of growth engines that enable it to continually generate inflows, deploy capital, and generate realizations.

FY2023 Outlook

American consumers are about to feel the sting of soaring bond yields. While growth has been remarkably resilient, if you maintain a tight policy for a long time, the economy will invariably slow.

Despite challenging business conditions in some areas of the BX empire, BX is capitalizing on times of turmoil; attractive opportunities arise in tough times thus enabling those with a high degree of liquidity to reap attractive profits in the future.

One area of business BX has ramped up is corporate lending. BX has indicated that corporate lending now yields returns in the low-teens and more. In the Credit business, BX now has ~$300B in AUM and ~$40B in 'dry powder'. As a firm, however, BX has ~$200B of 'dry powder' to capitalize on attractive investment opportunities.

BX has reached the stage where it can do sizable deals most other asset managers are unable to do. Investing in larger companies has many advantages, especially in these more challenging times. In this analysis, BX's co-CEOs of Blackstone Private Credit Fund and Blackstone Secured Lending Fund explain why.

On the Q3 earnings call, management stated that it has raised ~80% of its $150B target in the drawdown fund business but less than half was earning management fees at the end of Q3. In September, BX also launched the investment period for its new European real estate flagship; this will earn management fees after an effective 4-month fee holiday for first closers.

Over the next several quarters, subject to deployment, BX expects to activate the new flagships for:

• private equity;
• private equity energy transition; and
• growth equity and infrastructure secondaries.

BX's platform of perpetual strategies continues to expand. These strategies generate fee-related performance revenues quarterly based on investment performance.

In the insurance area of BX's business, AUM has reached $178B, an 18% YoY increase. This increase has been driven by robust inflows from major clients from whom BX anticipates substantial, largely contractual inflows in the years ahead.

Credit Ratings

BX's senior unsecured domestic long-term debt ratings are at the top of the upper-medium-grade investment-grade tier. There is no change from prior reviews.

• S&P Global assigns an A+ long-term unsecured debt credit rating with a stable outlook; and
• Fitch assigns an A+ long-term unsecured debt credit rating with a stable outlook;

These ratings define BX as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

These are BX's deconsolidated Balance Sheet highlights for Q3 2023.

Dividends and Share Repurchases

Dividend and Dividend Yield

Although BX distributes a quarterly dividend, it may not appeal to investors who prefer a long-term track record of dividend increases.

BX's dividend policy is based on Distributable Earnings (DE) so its quarterly dividend will naturally fluctuate quarterly:

'We intend to pay to holders of common stock a quarterly dividend representing approximately 85% of The Blackstone Group Inc.’s share of Distributable Earnings, subject to adjustment by amounts determined by our board of directors to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and funds, to comply with applicable law, any of our debt instruments or other agreements, or to provide for future cash requirements such as tax-related payments, clawback obligations and dividends to shareholders for any ensuing quarter. The dividend amount could also be adjusted upward in any one quarter.'

On October 19, 2023, BX declared a $0.80/share quarterly dividend payable on November 6. Since BX's quarterly dividend fluctuates, I do not calculate BX's forward dividend yield.

I look at an investment's total potential long-term return perspective (capital gains and dividend income). It is for this reason that changes in BX's quarterly dividend do not influence my investment decision-making process.

Share Repurchases

BX is hyper-focused on capital allocation. The extent to which it repurchases shares depends on whether there is a meaningful deterioration in BX's share price relative to the true underlying value.

Despite an increase in the number of outstanding shares over the past several quarters, my interest lies in the potential for appreciation in the underlying value of each share over the long term.

Valuation

I typically look at:

• diluted EPS;
• adjusted diluted EPS; and
• Free Cash Flow (FCF)

metrics to gauge the valuation of most companies I analyze. These metrics, however, are of little relevance when trying to assess BX's performance and outlook.

BX uses Distributable Earnings (DE) and Fee Related Earnings (FRE) to more accurately measure its performance; these, and other terms, are defined within the FY2022 Form 10-K.

The very manner in which BX operates makes it virtually impossible to estimate future DE and FRE. Furthermore, BX does not provide guidance.

The reason BX is not easy to value is that it raises large pools of capital from clients for deployment thus resulting in multiple multi-billion-dollar acquisitions annually. Because it continually makes sizable investment transactions (acquisitions or divestitures), earnings estimates can quickly become outdated.

Some of the assets are meant to be perpetual holdings. In other cases, BX uses its expertise to improve the performance of the companies in which it invests with the intent of monetizing these assets as part of its capital recycling programs. It is not, therefore, unusual to see wide swings in YoY GAAP results.

Looking at DE and FRE results extracted from the FYE 2017 - FY2022 Earnings Presentations, we see BX's impressive track record.

Final Thoughts

Alternative asset exposure (eg. private equity, private debt, hedge funds, real estate, commodities, structured products, venture capital) can produce attractive long-term investment returns. Directly investing in alternative assets, however, is beyond my risk tolerance. This is why a portion of my alternative asset exposure is through BX.

A drawback with a BX investment is that it is impossible to know what investments are held within each fund. My BX investment, therefore, is partially made on the premise that BX is in the business of making money for highly sophisticated investors. Given that wealthy investors entrust billions with BX, I am inclined to 'follow the money'.

Furthermore, senior BX executives have significant share ownership and have considerable incentive to ensure BX's long-term success.

I last acquired BX shares on May 9 @ $81.649/share and disclosed this purchase in my May 12 post. My current BX exposure is 1471 shares which are held in a 'Core' account in the FFJ Portfolio; BX was my 20th largest holding when I completed my Mid-2023 Investment Holdings Review at which time the share price was ~$93.

If BX were to retrace close to my May 9 purchase price, I would very seriously consider acquiring additional shares. Much would depend, however, on what other companies are 'on sale'.

For now, I consider BX to currently be moderately undervalued but only intend to increase my exposure through automatic dividend reinvestment. If BX's share price remains close to the current ~$94.50, I should receive an additional 10 shares ((1471 * $0.80 * 85%)/$95); shares are held in a non-registered account and as a Canadian resident I incur a 15% dividend withholding tax.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long BX.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.