Blackstone Group LP (BX, Financial), the $36.8 billion asset manager led by 69-year-old Chairman and CEO Steve Schwarzman, delivered its fourth-quarter and full-year 2016 results last week. Schwarzman is the chairman of President Donald Trump's strategic and policy forum.
Blackstone’s total sales for 2016 grew by 10% to $5.13 billion and profits by an amazing 46% to $1.04 billion. Shares of the asset manager rose by 1.9% while the broader Standard & Poor's 500 index had -0.07% change that day.
As observed, Blackstone’s total performance fees, total investment income and especially other revenue for 2016 increased by 21%, 74% and 604% while total expenses fell by 5%, and taxes were reduced by 30% compared to 2015.
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“Blackstone’s most recent results marked a strong finish to a turbulent year as fourth-quarter earnings nearly doubled versus the prior-year period. Full-year earnings rose significantly due to greater appreciation across the investment funds as well as strong growth in fee-related income. Our robust investment returns attracted best-in-class capital inflows, driving total assets under management to $367 billion, another record. And we continue to pay substantial distributions to our unitholders, delivering over $8 billion of value in the past three years, which is the highest of any public firm in our industry.” – Stephen A. Schwarzman, chairman and CEO
Total returns
Blackstone has outperformed the broader S&P 500 index in both short- and long-term time frames. According to Morningstar data, Blackstone shares had total returns of 18.7% in the past five years compared to S&P 500’s 13.7%. In the past year, Blackstone provided 24.2% vs. S&P 500’s 22.8%.
Valuations
Blackstone is by no means cheap with its current market price of $30.74 per share. According to GuruFocus data, the constant outperformer had a trailing price-earnings (P/E) ratio of 20 times (industry median of 14.4), price-book (P/B) ratio of 3.8 times (industry median of 1) and price-sales (P/S) ratio of 7.2 times (industry median of 7).
The asset manager also had a trailing dividend yield of 4.96% with a 139% payout ratio and a 35.2% five-year dividend growth rate.
(Earnings Press Release, Blackstone)
Blackstone
The 32-year-old Blackstone Group is an American multinational private equity, alternative asset management and financial services corporation based in New York City.
The asset manager had assets under management of $367 billion in 2016, a 9.1% increase from the previous year.
In its filing, Blackstone runs as a leading global alternative asset manager that includes operations in investment vehicles focused on private equity, real estate, hedge fund solutions, noninvestment grade credit, secondary funds and other multiasset class strategies.
Blackstone had four business segments: Private Equity, Real Estate, Hedge Fund Solutions and Credit. Meanwhile, Blackstone’s total revenue generation can be subdivided into four parts: management and advisory fees, performance fees, investment income and interest and dividend revenue and other.
Management and advisory fees
Blackstone generates revenue from fees earned pursuant to contractual arrangements with funds, fund investors and fund portfolio companies (including management, transaction and monitoring fees) and capital markets services.
Performance fees
The asset manager also invests in the funds the company manages and, in most cases, receives a preferred allocation of income or an incentive fee from an investment fund in the event that specified cumulative investment returns are achieved.
Investment income and interest and dividend revenue and other
The net investment gains and investment income generated by the Blackstone Funds, principally private equity and real estate funds, are driven by value created by our operating and strategic initiatives as well as overall market conditions.
(Revenue per Segment Found in Earnings Press Release, Blackstone)
Private Equity
Blackstone is a world leader in private equity investing. Blackstone has managed six general private equity funds as well as two sector focused funds since the private equity business was established in 1987.
Funds and parts of Blackstone’s private equity:
- Blackstone Capital Partners funds – represents Blackstone’s corporate private equity funds collectively.
- Blackstone Tactical Opportunities – functions as an opportunistic investment platform that invests globally across asset classes, industries and geographies.
- Strategic Partners Fund Solutions – functions as a secondary private fund of funds business.
- Blackstone Total Alternatives Solution – a new multiasset investment program for eligible high net worth investors offering exposure to certain of Blackstone’s key illiquid investment strategies through a single commitment .
- Blackstone’s capital markets services.
In review, Blackstone’s corporate private equity business pursues transactions throughout the world across a variety of transaction types including large buyouts, mid-cap buyouts, buy and build platforms and growth equity/development projects.
As of December 2016, assets under management under Blackstone’s private equity segment grew by 6.3% to $100.2 billion. Fee-earning part of the private equity’s assets under management were $69.1 billion in 2016 compared to $51.5 billion the year prior.
Total net Internal Rate of Return (IRR) or the annualized inception to Dec. 31, 2016 IRR on total invested capital based on realized proceeds and unrealized value, as applicable, after management fees, expenses and carried interest for Blackstone’s total corporate private equity was 15%Â – compared to 16% the year prior (2).
Total private equity net IRR, meanwhile, was at 15% in 2015.
Blackstone’s Private Equity total revenue declined by 1.6% to $1.36 billion in 2016 or 27% of total Blackstone segment sales. The Private Equity segment also had an economic income margin, excluding total expenses per segment, of 43% compared to 47% in 2015.
Real Estate
Blackstone’s investment real estate has grown to become a world leader since its inception in 1991, according to company filings.
Blackstone has managed or continues to manage a number of global, European and Asian focused opportunistic real estate funds, several real estate debt investment vehicles, a New York Stock Exchange (NYSE) publicly traded real estate investment trust (BXMT) and several core plus real estate funds.
Funds related to Blackstone real estate investments: Blackstone Real Estate Partners (BREP) funds – opportunistic real estate funds; Blackstone Real Estate Debt Strategies (BREDs) funds – real estate debt investment vehicles, and core plus real estate funds – Blackstone Property Partners funds.
In 2016, assets under management for Blackstone real estate grew by 8.63% to $102 billion while fee-earning assets under management were $72 billion compared to $67.3 billion in 2015.
Total net IRR for BREP for 2016 was 16% compared to 16% in 2015.
In 2016, total net IRR for BREDs and BPP were 13% and 11% while both had 18% and 12% in 2015.
Blackstone’s Real Estate total revenue grew by 22.7% to $2.2 billion in 2016 or 43% of total Blackstone segment sales. The Real Estate segment also had an economic income margin of 55% – highest among the segments – compared to 53% in 2015.
Hedge Fund Solutions
Blackstone’s Hedge Fund Solutions segment is comprised principally of Blackstone Alternative Asset Management.
Blackstone Alternative Asset Management is the world’s largest discretionary allocator to hedge funds, managing a broad range of commingled and customized hedge fund of fund solutions since its inception in 1990.
Blackstone’s Hedge Fund Solutions offers investment platforms that seed new hedge fund talent, purchase ownership interests in more established hedge funds, invest in special situation opportunities, create alternative solutions in regulated structures and trade long and short public equities.
Assets under management in Hedge Fund Solutions grew by 2.9% to $71.1 billion in 2016 while fee-earning of the assets under the segment were $67 billion compared to $65.7 billion the year prior.
Total net IRR for Hedge Fund Solutions was 2% in 2016 compared to 6% in 2015.
Blackstone’s Hedge Fund Solutions total revenue grew by 2.6% to $605.7 million in 2016 or 12% of total Blackstone segment sales. The Hedge Fund business had an economic income margin of 48% compared to 50% in 2015.
Credit
Blackstone’s credit segment consists principally of GSO Capital Partners LP – a global leader in managing credit-focused products within private and public debt market strategies.
GSO’s products include senior credit-focused funds, mezzanine funds, distressed debt funds, general credit focused funds, registered investment companies, separately managed accounts and collateralized loan obligation vehicles.
Assets under management for the Credit segment grew by 18% to $93.3 billion while fee-earning assets were $69 billion compared to $61.7 billion in 2015.
Total net IRR for Blackstone’s Credit segment was 14% for 2016Â – similar to 2015’s results.
Blackstone’s Credit business total revenue grew by 85.3% to $898.5 million in 2016 or 18% of total Blackstone segment sales. The Credit business had an economic income margin of 46% compared to 44% in 2015.
Overall, Blackstone had three-year sales and profit growth/loss averages of -5% and 9%.
Cash, debt and book value (1)
As of September, Blackstone had $1.78 billion in cash and cash equivalents and $7.25 billion in debt having a debt-equity ratio of 0.75 times compared to 0.61 the year-earlier quarter.
Blackstone also had 8.2% of its $24.4 billion assets in goodwill and intangibles having a book value of $9.64 billion in book value compared to $10.11 billion the year prior.
Cash flow
(10-Q, Blackstone)
Cash flow from operations for Blackstone’s past three quarters fiscal 2016 dipped by 52% to $662 million. Few items that contributed to more cash outflow for Blackstone for the period were noncash performance fees, securities sold, not yet purchased, and cash held by Blackstone Funds and Other.
Capital expenditures for Blackstone were $18.46 million leaving the asset manager with $643.8 million in free cash flow compared to $1.32 billion the year earlier quarter.
Blackstone also had provided $1.51 billion in dividends or 234% of its free cash flow for the period. On average, Blackstone paid out 114% of its free cash flow in distributions to its unit holders in the past three years from 2013 to 2015.
(10-K and Morningstar Data, Blackstone)
As observed in the image above, distribution payouts have been increasing more in recent years.
Blackstone also uses Distributable Earnings to represent cash available for distributions to unitholders (3). Blackstone’s intention is to distribute quarterly to common unitholders approximately 85% of The Blackstone Group LP’s share of Distributable Earnings.
On average, Blackstone would then have provided 82% of its Distributable Earnings to its unitholders as dividends in the past three fiscal years (4).
Meanwhile, Blackstone also took in $1.3 billion in debt while making debt payments of $315.7 million for the period.
Conclusion
Other than being an attractive source of dividends, the Blackstone limited partnership units also has recognizable moat in the investment industry – in the alternative asset management industry in particular.
In addition, the asset manager also carries significant dry powder or undrawn capital amounting to $101 billion as of December 2016, $43.6 billion of which is for private equity deals and another $32.1 billion for real estate.
Further, overall assets under management have been growing relentlessly in recent years accompanied by maintained net returns in Blackstone’s most profitable segment, in terms of economic income, Real Estate and also as observed in the Credit segment.
Meanwhile, GAAP measure of cash flow indicated that Blackstone would have overpaid its free cash flow as distributions to unitholders in recent years. In contrast, the payouts were covered satisfactorily by Blackstone’s Distributable Earnings rather.
Meanwhile, Credit Suisse see Blackstone as an undervalued top asset manager pick with a target price of $40, according to Barron’s.
(Blackstone unit price at $30.74 with a trailing P/E ratio of 20 times, GuruFocus)
Historical earnings multiple also suggests that Blackstone’s current unit price is undervalued compared to its five-year average of 33 times.
In summary, Blackstone is a speculative buy with a $35 per unit price target.
Notes
- Me: I used information available from Blackstone’s recent 10-Q filing that was on Nov. 8. Data found on recent press release does not fill all my required table of information. Meanwhile, Blackstone should be filing its 2016 10-K by the end of February.
- Total net IRR figures are preliminary or as found in Blackstone’s earnings press release.
Read: Blackstone Earnings Press Release.
- 10-K: Distributable Earnings is a component of Economic Net Income and the sum across all segments of: (a) Total Management and Advisory Fees, (b) Interest and Dividend Revenue, (c) Other Revenue, (d) Realized Performance Fees, and (e) Realized Investment Income (Loss); less (a) Compensation, excluding the expense of equity-based awards, (b) Realized Performance Fee Compensation, (c) Other Operating Expenses, and (d) Taxes and Related Payables Including the Payable Under Tax Receivable Agreement.
(Distributable Earnings, p. 84 of Blackstone’s 2015 10-K Filing)
- Me: Payout ratio was derived from GAAP dividend payouts over Blackstone’s Distributable Earnings.
Disclosure: I do not have shares in any of the companies mentioned.
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