On The Blackstone Group LP (NYSE: BX) following 3Q results, which were characterized by strong growth in fee-related earnings but lower realizations. Although we expect 2020 to be a weak year for realizations as the COVID-19 pandemic reduces asset values and leads to fewer asset sales, we believe that Blackstone continues to have strong long-term underlying earnings potential, particularly from growth in fee-based AUM. The company also entered the coronavirus downturn with over $150 billion in dry powder, and should be able to take advantage of significant market dislocations to purchase assets at discounted values.
Blackstone’s own research indicates that about 60% of the U.S. long-only and index fund/ETF market, with some $7.5 trillion of assets, is restricted from owning partnerships. While future changes in corporate tax rates are a risk, we believe the vastly greater share ownership potential remains an overriding incentive for conversion.
Blackstone’s held an Investor Day on September 21, 2018, its first such event in four years. Management emphasized the company’s performance and culture of innovation, and all major business units were represented. Blackstone is targeting $1 trillion of assets under management within eight years, up from $584 billion currently. The company sees considerable growth in real estate, private equity, infrastructure, tactical opportunities, and credit assets. We view the goal as aggressive, but achievable, though it will clearly require a cooperative economic environment and fundraising efforts. Blackstone is also in the midst of a significant step-up in fee-related earnings as its flagship funds hit certain milestones, including a 50% step-up in two years. It is also targeting 75% growth in fee-related earnings over the next several years. Over the long term, management expects fee-related earnings to account for about 65% of the total, up from 45% currently. We believe this is an important catalyst for an improving share price valuation, as it reduces variability in earnings and raises prospects for consistently higher distributions.
New avenues for growth include infrastructure investments, where Blackstone has made considerable fundraising efforts and noted solid interest from pension funds and sovereign wealth funds, as well as insurance.
On October 28, Blackstone reported 3Q20 distributable earnings (DE) of $0.63 per unit, up from $0.58 a year earlier and above the $0.55 consensus. Beginning with 4Q18 results, the company switched to DE from Economic Net Income as its primary measure of operating performance, as management believes it better reflects the way the company makes operating decisions, allocates resources, and determines employee compensation.
Total segment revenues were $1.46 billion in 3Q, up 6% from the prior year, as strong base management fees were partly offset by lower realizations. Fee-related earnings were $611 million, up 39%, aided by higher fee-earning AUM.
Blackstone continues to take in money faster than it can put it to work. Committed but uninvested capital, known as ‘dry powder,’ stood at $152.4 billion.
EARNINGS & GROWTH ANALYSIS
We believe that Blackstone has strong long-term underlying earnings potential, especially from fee-related earnings, although 2020 is expected to be a weak year for realizations as the pandemic reduces asset values and leads to fewer asset sales. Total AUM rose to $584 billion as of September 30, up 5% from the prior year. More important to earnings, fee-earning AUM rose 13%, to $445 billion. Blackstone had $115.2 billion of perpetual capital, up 19% from the prior year, mostly in real estate and credit & insurance, enabling it to make long-term decisions and not sell at inappropriate times.
Fee-earning assets in real estate rose 18% in 3Q, to $138 billion. The segment had $1.9 billion of realizations in 3Q, aided by the IPO of Mindspace Business Parks. Fourth-quarter realizations should get a boost from the post-quarter recapitalization of BioMed Realty Trust.
Fee-earning assets in private equity were up 32% in 3Q, to $130 billion. The company had $4.7 billion of realizations in private equity and invested $4.1 billion during the quarter.
Fee-earning assets in credit & insurance were up 1% in 3Q, to $105 billion. Realizations were $1.2 billion, while capital deployed was $1.8 billion.
With a better-than-expected 3Q, we are raising our 2020 estimate for distributable earnings to $2.14 from per share from $1.95, while maintaining our 2021 forecast of $2.82. We believe that Blackstone will continue to benefit from a rapidly increasing fee-based component to earnings.
FINANCIAL STRENGTH & DIVIDEND
Blackstone ended 3Q20 with $5.6 billion in cash, corporate treasury and liquid investments, and cash and net investments of $11.1 billion. In September 2020, Blackstone issued $500 million of 10.5-year notes at 1.6% coupon and $400 million of 30- year notes at 2.8% coupon.
Blackstone’s 2019 distributions totaled $1.71 per share. We look for distributions of $1.91 (up from $1.77) in 2020 and $2.52 in 2021 (up from $2.48).
In 3Q20, Blackstone repurchased 2.0 million common shares, bringing repurchases over the past year to 10.5 million.
MANAGEMENT & RISKS
Blackstone is led by Chairman & CEO Stephen A. Schwarzman, who co-founded the firm in 1985. In February 2018, Blackstone named Jon Gray (formerly the head of the firm’s Real Estate segment) as president and COO, replacing Tony James, who is now executive vice chairman.
An investment in Blackstone carries substantial risks. Blackstone’s funds can have hidden dangers that investors cannot anticipate in advance.
In recent years, Blackstone has rapidly grown its fee-earning assets under management, and its assets are relatively well balanced among private equity, real estate, hedge funds, and credit.
We believe that BX remains a best-in-class manager of alternative assets, as demonstrated by its return on investment metrics, monetization performance, distribution history, and ability to attract global capital. BX currently trades at about 24-times our 2020 estimate of distributable earnings (DE), a multiple that has increased with the company’s conversion to corporate from limited partner status. Given the company’s operating margins in the high 40s.