Our investment case for Blackstone is that it is a well-diversified alternative asset manager. Management fees will go up (catching up to its recent torrid net inflows), realization will increase (especially in Real Estate group) and performance fees will be earned and distributed as dividends to shareholders.
On that note, I think 3Q results confirmed our thesis: great asset inflows, early sign of real estate monetization and increasing performance fee earning assets due to strong market return. However, I don’t think 3x performance fee from bull side is the right way to look at BX – by my estimate, BX trades at cumulative 9 years performance fee (detail below). Using 9x P/E, I think the stock is worth $19 or 26% upside.
I think the attractiveness of Blackstone is its diversified platform which allows it to tap any market opportunity. 70% of AuM has 10-12 years commitment and a lot of management fees are earned on committed capital basis instead of NAV (thus market up/down has less of an impact).
I understand the background of this rapid AuM increase: pension funds are feeling the pressure and are allocating more to alternative asset classes given their actuarial return assumption (allocation from 5% in ’95 to 12% in ’03 and 20% in ’11). Meanwhile, they are consolidating the allocation into fewer platforms. As such, Blackstone is the main beneficiary of this trend.
Another way to look at it is that total AuM is $190bn and fee-earning AuM is $158bn but performance fee-earning AuM is only $49bn. However, this points to the upside once market recovers and M&A is booming that Blackstone could shoot the lights out. This is confirmed by 3Q results that AuM/Perf-earning AuM at 3.1x vs. 3.8x in 2Q.
Long story short, there are many ways to value the company. We could use ENI, distributable earnings, cash earnings or DCF on distributable earnings. In the end, I decide to settle down on ENI PE multiple because I could see consensus estimate and my multiple is simply a mix of fee and performance/income.
I am using 9x P/E and arrive a target price of $19/sh or 26% upside.