Company Reports

There was little in narrow-moat-rated Blackstone's first-quarter results that would alter our long-term view of the firm. We expect to leave our $125 per share fair value estimate in place. We view the shares as being fairly valued right now.

All the US-based asset managers we cover have reported their December-quarter earnings, and in some cases revealed assets under management, or AUM, data for January 2024. We now have a better sense of how recent market activity has been affecting results. In our third-quarter earnings wrap, we had assumed that the malaise that had crept into the markets during August-October 2023 might continue through the rest of the year.

We've increased our fair value estimate for narrow-moat-rated Blackstone to $125 per share from $110 to account for revised near-term expectations for assets under management, revenue, and profitability since our last update. While activity levels for investments, realizations, and fundraising remained muted during much of the past year, the company picked up $148.5 billion in new assets through fundraising during 2023. While this was worse than 2021 ($270.5 billion) and 2022 ($226.0 billion), it was still the firm's third-best year for fundraising in the past decade.

We consider Blackstone to be the preeminent alternative-asset manager, with $1.0430 trillion in total assets under management, including $762.6 billion in fee-earning AUM, at the end of 2023. The company has scale in all four business segments: private equity (22% of fee-earning AUM and 28% of base management fees), real estate (39% and 43%), credit and insurance (29% and 21%), and hedge fund solutions (10% and 8%). Blackstone has also built out a large base of employees—including in-house executives, consultants, and advisors—that have decades of industry experience and can revitalize a company or property through cost-cutting, acquisitions, or other strategic maneuvers.

While there was little in narrow-moat rated Blackstone's fourth-quarter results that would alter our long-term view of the firm, we expect to increase our $110 fair value estimate slightly once we've incorporated the results, as well as expectations for an improved 2024, into our valuation. This would leave the company's shares fairly valued relative to their Jan. 25 trading price.

While the runup in the equity markets the past several weeks is likely to have a positive impact on assets under management for the U.S.-based asset managers, we don't expect it to have too significant an impact on our fair value estimates, which are based on 10-year forecasts for AUM growth, fee rates, revenue, and profitability. As of the Nov. 29 market close, the traditional U.S.-based asset managers we cover were trading at an average price/fair value multiple of 0.97, making them only slightly undervalued, while the alternative-asset managers we cover were trading at an average price/fair value multiple of 1.09. This is far from the margin of safety we would need to recommend these more volatile names to long-term investors.

With all the U.S.-based asset managers we cover having reported quarterly earnings, and in some cases revealing assets under management data for October, we have a better sense of how the ongoing equity and credit market volatility is affecting results. Due to their lack of organic AUM growth—a product of having large exposure to higher-cost, poorer-performing active equity products in a market where low-cost passive products are preferred—most of the traditional U.S.-based asset managers have become dependent on equity market gains to expand their AUM. In an environment where fees are under pressure and profit margins are being affected by a need to spend more to maintain (if not improve) performance and enhance distribution, a precipitous decline in managed assets, like we saw during 2022, has a large negative impact on revenue and profitability, given the amount of operating leverage inherent in the asset manager business model.

There was little in narrow-moat-rated Blackstone's third-quarter results that would alter our long-term view of the firm. We are leaving our $110 per share fair value estimate in place and view the shares as being slightly undervalued right now. Blackstone closed out the third quarter with $734.5 billion in fee-earning assets under management, or AUM, up 0.5% sequentially and 4.1% year over year. Total AUM was $1.007 trillion, up 0.6% sequentially and 5.9% on a year-over-year basis. Adjusted net inflows of $2.4 billion during the third quarter were well off the positive $26.8 billion quarterly run rate we've seen for flows the past two years.

We consider Blackstone to be the preeminent alternative asset manager, with $1.001 trillion in total assets under management, or AUM, including $731.1 billion in fee-earning AUM, at the end of June 2023. The company has scale in each of its four business segments: private equity (23% of fee-earning AUM and 27% of base management fees); real estate (39% and 44%); credit & insurance (28% and 21%); and hedge fund solutions (10% and 8%). Blackstone has also built out a large base of employees—including in-house executives, consultants, and advisors—that have decades of industry experience and can successfully revitalize a company or property through cost-cutting, acquisitions, or other strategic maneuvers.

With the U.S.-based asset managers having reported their latest quarterly earnings, and in some cases revealing assets under management data for the end of July 2023, we have a better sense of the impact the recovery in the U.S. equity markets is having on results. As we've noted in the past, most of the traditional U.S.-based asset managers have become wholly dependent on equity market gains to grow their assets under management, given their lack of organic AUM growth, due to large exposure to higher-cost, poorer-performing active equity products relative to low-cost passive products. In an environment where fees are under pressure and profit margins are being affected by a need to spend more heavily to improve investment performance and enhance distribution, a precipitous decline in managed assets as we saw during 2022 has a large negative impact on revenue and profitability—especially considering the amount of operating leverage inherent in the asset manager business model.

There was little in narrow-moat Blackstone's second-quarter results that would alter our long-term view of the firm. We are leaving our $105 per share fair value estimate in place, and we view the shares as being fairly valued right now. Blackstone closed out the June quarter with $731.1 billion in fee-earning assets under management, or AUM, down 0.1% sequentially but still up 6.9% year over year. Total AUM finally surpassed the $1 trillion mark, as the company closed out the period with $1.001 trillion in assets, up 1.0% sequentially and 6.4% on a year-over-year basis.

We consider Blackstone to be the preeminent alternative asset manager, with $991.3 billion in total assets under management, or AUM, including $732.09 billion in fee-earning AUM, at the end of March 2023. The company has scale in each of its four business segments: private equity (23% of fee-earning AUM and 30% of base management fees), real estate (39% and 41%), credit & insurance (28% and 20%), and hedge fund solutions (10% and 9%). Blackstone has also built out a large base of employees--including in-house executives, consultants, and advisors--that have decades of industry experience and can successfully revitalize a company or property through cost-cutting, acquisitions, or other strategic maneuvers.

While there was little in narrow-moat Blackstone's first-quarter results that would alter our long-term view of the firm, we expect to reduce our fair value estimate slightly to adjust for weaker flows and realizations in the near term than we projected. We view Blackstone as being moderately undervalued right now and envision the stock potentially getting a boost in the near term if it is added to the S&P 500 index (now that S&P Dow Jones Indices has relaxed its criteria to allow firms with more than one class of stock into its U.S. indexes).

While Blackstone's shares traded down more than 3% April 3 on news that redemption requests for the Blackstone Real Estate Income Trust, or BREIT, ticked up again in March, we do not expect to alter our fair value estimate or narrow moat rating on the firm. BREIT, which is geared more toward income-oriented investors above a certain wealth threshold (but below the standard threshold for most of Blackstone's private equity and private credit funds), was designed to generate steady cash flows for investors, with its annualized distribution rate being 4.5% since inception and the fund itself increasing in value 14.7% on an annualized basis over the past three years at the end of February 2023.

A concern we'll address on the heels of our previous note on the alternative asset managers—narrow-moat Blackstone, KKR & Company, and Carlyle Group—is that while the industry may have dodged a bullet as regulators have moved to tap the Deposit Insurance Fund to backstop deposits held in the collapsed Silicon Valley Bank, we will need to see another institution step in to fill the void left by SVB for the ecosystem that has allowed investments in startups and early-stage technology firms to be so lucrative for the alternative asset managers in the past to continue to do so in the future. For the time being, we are leaving our Uncertainty Ratings for the alternative asset managers at High on the belief that we will eventually see some entity step in and take SVB's place.

We do not anticipate changing the fair value estimates, economic moats, or uncertainty ratings for the three alternative asset managers we cover—Blackstone, KKR & Company, and Carlyle Group—following the crisis that erupted over the past week with Silicon Valley Bank.

While there was little in narrow-moat Blackstone's fourth-quarter results that would alter our long-term view of the firm, we are likely to reduce our fair value estimate slightly to adjust for weaker flows in the near term than we had been previously projecting. We view Blackstone as being moderately undervalued relative to our revised fair value estimate.

We don't envision making a significant change to our $115 per share fair value estimate for Blackstone following news that the firm has limited withdrawals from its $70 billion non-listed real estate investment trust fund, known as BREIT, due to a surge in redemption requests during October and November. The company made this announcement late last week after the level of withdrawal requests it received in October exceeded the fund's monthly limit of 2% of its net asset value, as well as its quarterly threshold of 5% of NAV. Blackstone has not been alone in limiting redemptions, as Starwood Real Estate Income Trust, which is also a nontraded REIT (and the second-largest such fund behind BREIT), announced early this week that it would be curbing redemptions after investor withdrawal requests exceeded the fund's monthly limit in November (with the fund also limiting monthly redemptions to 2% of NAV and quarterly redemptions to 5% of NAV).

We've lowered our fair value estimate for narrow-moat-rated Blackstone to $115 per share from $125 after updating our valuation model to include weaker equity and credit market returns in the near term, which will have a negative impact on assets under management. Our new fair value estimate implies a price/earnings multiple of 22.2 times our 2022 estimate, 20.5 times our 2023 estimate, and 16.4 times our 2024 estimate for distributable earnings per share (which remove the effects of unrealized activity). For some perspective, during the past five (10) years, the company's shares have traded at an average of 23.5 (23.5) times trailing distributable earnings.

We consider Blackstone to be the preeminent alternative asset manager, with $950.9 billion in total assets under management, or AUM, including $705.9 billion in fee-earning AUM, at the end of September 2022. The company has scale in each of its four business segments: private equity (24% of fee-earning AUM and 31% of base management fees), real estate (39% and 40%), credit & insurance (27% and 20%), and hedge fund solutions (10% and 9%). Blackstone has also built out a large base of employees--including in-house executives, consultants, and advisors--that have decades of industry experience and can successfully revitalize a company or property through cost-cutting, acquisitions, or other strategic maneuvers.