Will Alternative Asset Manager Blackstone Continue to Outperform?
Relative outperformance
The alternative asset management industry suffered steeply during the third quarter this year as industry-wide earnings fell by 90%. Blackstone (BX) also reported a net economic loss of $416 million for the third quarter of 2015. The company’s earnings fell due to a market rout in US stocks as well as international ones. The company’s distributable earnings were $692 million, or $0.58 per unit, in 3Q15, up 1% from the corresponding period last year.
The net realized performance fees also rose at a compounded annual growth rate of 88% on the past two years to $2.7 billion in 3Q15.
Valuations
Blackstone’s stock fell 28% over the past six months on the expected fall in portfolio holdings. However, the company had its best performing quarter in 1Q15. The company also stated in its conference call for third quarter earnings that most of its losses were reversed in the current quarter.
Blackstone’s valuation fell to 9.1x on a one-year forward earnings basis compared to its peers trading at 7.3x. The premium widened marginally over the last few months due to the outperformance of the company when compared to its peers in alternative investment management.
Alternative asset managers are trading at a discount compared to traditional asset managers such as BlackRock (BLK), The Bank of New York Mellon (BK), and Franklin Resources (BEN).
Long-term trajectory
Blackstone’s focus on the performance of its portfolio companies and constant offerings to its network of limited partners could remain as important factors in the company’s future performance.
Diversification through offerings such as hedge funds, credit, and advisory could lower Blackstone investors’ general risk perception, and debt markets should generate returns in the range of 4%–5%. If Equity’s attractiveness rises, the overall perception of alternative asset managers should too, especially for the bigger players that are part of the iShares Dow Jones US Financial ETF (IYF).
From our perspective, Blackstone has seen the bottom in terms of value for its portfolio holdings. The company could benefit from record dry powder or undrawn capital, improvement in European equity and debt markets, as well as domestic equity markets.
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