(This is a highly-abbreviated version of a full SumZero report republished with the author's consent)
Contributor: Brian W.
Source: Withheld. New York, NY.
Recommendation: Long Blackstone (NYSE: BX)
Timeframe: 2 Years and Beyond
Recent Price: $12.15
Target Price: $17.00
The thesis for Blackstone Group is a relatively simple one. In the current low rate no return environment pension funds and endowments will struggle to meet their required return thresholds. As they quickly come to this realization they will start to shift increasing amounts over to alternative assets (private equity, real estate, hedge funds, etc.).
While this sounds a bit like a pitch for the entire alternative asset management industry, I think Blackstone Group is particularly well positioned to benefit from this oncoming wave of capital - an interesting stat on this, based on a survey by Russell Investments institutional investors plan on increasing their allocation to alternatives by 500 basis points (from 14% to 19%) over the next two years, with the major beneficiaries within this category being private equity, commodities, and infrastructure.
A 500 basis point increase in allocation equities to a $1.4 trillion opportunity for the alternative asset management space. Assuming private equity gets the benefit of even just 1/4 of this amount it would equate to a $350 billion allocation. As Blackstone is the largest private equity GP it would make sense that they would receive some proportion of this amount thereby significantly increasing AUM. Currently less than 30% of AUM is in private equity assets.
Blackstone Group is a leader in all the markets it operates and has above average returns in almost all of its units. This is important as economic net income (ENI) is comprised of fee based revenues, incentive based revenues, and investment income from principal investments.
Fee earning AUM ended the most recent quarter at $156.3B - during the quarter they had inflows of $19.6B. Total AUM ended the period at $190.1B. YTD Blackstone's share price is down 20% while inflows have ticked up. The street is currently not giving them any credit for the upcoming "harvest" period on any of their funds. Granted I agree that carried interest income should have a lower multiple (if any) from the more normal recurring income.
So add in the dividend yield to the current cheap stock price and its not too hard to see some nice double digit returns (if we assume it takes 3 years to get there our return per year would be 17.3% (that is assuming the bare minimum on dividends and no real upside from AUM growth). Net-net I think the current price is attractive and offers investors a great way to play one of the best asset management firms around today.