Blackstone reported earnings this morning. They continue to print amazing growth in earnings. Here’s a quick summary:
| 2014 Inv. Day | 2018 Inv. Day | Q1-22 LTM | |
| Fee Earnings | $0.86 | $1.14 | $3.70 |
| Fee + Carry Earnings (Distributable Earnings) | $1.60 | $2.49 | $5.36 |
| Stock Price | $34 | $37 | $119 |
This has been one of our better investments and as with all good ones, one only wishes they owned more than they did initially. But where from here?
Blackstone changed the trajectory of its growth by, in my opinion, doing two things:
- It pivoted from classic go-anywhere opportunistic investing to thematic investing. I believe what it effectively means is they pay less attention to “deep value” purchase prices and shifted downside protection to secular growth trends. An example is their industrial real estate bet, to which they have tens if not greater than $100B invested in the sector. They believe the continued share growth of e-commerce vs brick and mortar provides the downside protection previously provided by a value price. Overall, thematic investing gave Blackstone the license to deploy gargantuan amounts of capital as the price setter in the market, and thereby grow AUM dramatically on the back of investor demand for bond allocation replacements.
- It expanded from opportunistic (e.g., ~20% expected net returns) investing to core / core+ investing (e.g., from ~5-15% expected net returns). The available investments that have lower expected core/core+ returns dwarfs the opportunistic market. It plays right into the hand of thematic investing, allowing Blackstone to, for example, invest in industrial real estate debt, preferred equity, and vanilla equity. The lower, although still highly respectable, return profile also allowed for products that are more appropriate for retail investors (a topic for another day).
Going forward, my largest worry with respect to Blackstone and its now Big Reputation is that those that are price setters (read: paying up) for growth investments may be the recipient of lower returns going forward. Trees don’t often grow to the sky. If this was a large holding for us, I would be reducing it.
That said given its modest size in the portfolio, I’m willing to give the Blackstone team the benefit of the doubt. They have been a highly innovative team (relatively speaking) over the past 10 years, and I presume they will continue shifting their product set by taking risks that others aren’t taking. Given the now near perpetual nature of their capital base, at worst, we are clipping a roughly 15% dividend yield based on the cost of our investment on a highly durable business model.
Disclosure: We own shares of Blackstone, this is not investment advice. Do your own work.