Private equity fund manager Blackstone Group has traveled a
rocky road since going public in June 2007. When the financial
crisis hit, its portfolio of debt-laden leveraged buyouts dragged
down performance. The stock bottomed at 3.55 in February 2009, a
huge fall from its $31 offering price less than two years
) kept raising money from its institutional investors and wisely
put that money to work in real estate and other markets beyond
its traditional LBOs of operating companies.
"Almost $76 billion of our current assets under management of
$218 billion come from new products, new strategies and new
regions that didn't exist for us at the time of our IPO six years
ago," Chairman and CEO Stephen Schwarzman told analysts April 18.
He co-founded Blackstone with Pete Peterson.
With a sustained boost from favorable Fed interest rate
policies, Blackstone has benefited mightily from rallies in
equity, real estate and credit markets.
Last year, assets under management rose 15%. And with
Blackstone finding markets increasingly receptive to IPOs of its
portfolio companies --SeaWorld Entertainment (
) was the most recent example -- it has hiked its returns to
investors and shareholders. Distributable earnings of $379
million in the first quarter trailed only the prior quarter for
the best performance since the 2007 IPO.
A key metric for asset mangers like Blackstone is realized
performance fees, the money the firm gets when it can exit an
asset through an IPO or other type of sale. Blackstone's two most
recent quarters have also featured its two strongest post-IPO
quarters in realized performance fees.
Such "realizations," along with the fees Blackstone earns for
managing more than $200 billion in assets, allowed the company to
distribute 30 cents per unit to investors in the first quarter,
That's triple last year's distribution, CFO Laurence Tosi proudly
noted in comments to analysts April 18.
And things could improve from here. Blackstone is now poised
to harvest assets from its huge real estate portfolio, which
stood at $56.7 billion at Dec. 31, 2012. With holdings in hotels,
offices, commercial real estate and homes, Blackstone can soon
capitalize on the broad real estate rebound.
"The acceleration in earnings will come from real estate.
There are growing exit opportunities. Real estate has potential
to move the needle," said Daniel Fannon, analyst with Jefferies
Much has been made of the "carried interest" loophole that
enables private equity managers to pay lower tax rates on the
appreciation of their portfolios. But at this point, friendly Fed
policies may be playing an even bigger role in Blackstone's
Don't fight the Fed, the old saw goes. Better still to have a
friendly Fed using its high-capacity lungs to blow a steady wind
at your back, thereby lifting the value of your assets.
With the Fed suppressing interest rates for years,
yield-hungry investors have embraced riskier assets. And
Blackstone has everything from debt-laden LBOs to exotic loan and
hedge fund portfolios within its $218 billion under
"The Fed's lower interest rates have helped asset valuations
across the board, including Blackstone's real estate, corporate
private equity and credit investments," said David Chiaverini,
research analyst with BMO Capital.
Rock-bottom rates are an all-purpose elixir for a leveraged
buyout company and asset manager like Blackstone.
"There's no doubt that attractive financing at low rates has
provided them with additional opportunities in terms of doing
leveraged deals," noted Jefferies analyst Fannon. "It has clearly
allowed operating companies to lower their finance costs. With
real estate, it will help them if they want to be sellers in an
environment where people can get financing."
While Blackstone has benefited from government tax and
interest rate policies, it has also made some canny moves on its
In real estate, especially, Blackstone's timing has been good.
"They were very aggressive in selling down real estate
precrisis," explained Sterne Agee analyst Jason Weyeneth.
Then, several years later, Blackstone moved opportunistically
to pick up distressed properties. "Beginning in 2009, they got
aggressive. They bought a lot of office properties," said
"Hotel and office are the two big areas" for Blackstone in
real estate, he adds. But starting in early 2012, Blackstone also
swooped in on depressed residential real estate markets such as
Arizona, California and Florida.
"It was good timing," said Weyeneth, who estimates that
Blackstone has picked up nearly $4 billion worth of depressed
residential property. Blackstone will convert many of the
foreclosed homes it has acquired to rental use. "Longer term,
they are going to be a very large owner of residential properties
with stable income streams," he said.
That's just the sort of business that could appeal to a real
estate investment trust. Analysts believe Blackstone can now
create such REITs and sell them to the public. Or it can sell
hotel, office or residential properties to existing REITs, or
perhaps to a sovereign wealth fund buyer.
Either way, its hotel, office and residential properties can
soon bolster its pool of "distributable earnings." As much as 90%
of reported distributable earnings are returned to unit holders.
(As a partnership, Blackstone shares are technically units.)
Blackstone distributed 51 cents per unit in 2011. Last year,
distributions climbed to 72 cents. This year, analyst Weyeneth
expects distributions to reach $1.32. In 2014, he estimates
distributions will total $1.68.
Public offerings of operating companies in Blackstone's $51
billion private equity portfolio could also feed the
distributable earnings stream.
Michaels Stores, the arts and crafts retail chain taken
private in 2006, has already filed for a new public offering.
Other Blackstone portfolio companies could follow, especially if
the IPO market shows growing life.
Blackstone is also a leading manager of funds of hedge funds.
And it has expanded its investments in a wide range of debt,
particularly corporate bank loans.
Still, analysts see new opportunities for this asset
management behemoth. Especially promising are Asian real estate
and the management of retail investor funds.
To this point, Blackstone manages mostly institutional monies.
But as chief operating officer Hamilton James told analysts in
April: "The total amount of high-net-worth assets is bigger than
the total amount of institutional assets."
As long as the Fed keeps pushing investors into high-risk,
high-return assets, Blackstone should suffer no shortage of