BX – Red Deer Investments

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

2018 BX Investor Day, 2022 BX Q1 Earnings

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.

The NYT had an article about alternative investment firms. It wasn’t materially insightful. Here’s the best passage that I found:

To that end, the journalists that cover the alts tend to lump them all together. They started from the same place, but are on very different paths. Within 5 years I expect them to be notable different to journalists, and within 10 years to be in different “categories” altogether. Here’s the quick hit-list on my expectations:

Blackstone: Will continue down the path of becoming equity beta of large private market subsections. A continuation of their thrust into industrial real estate, multifamily real estate, entertainment / experience focused real estate, growth equity, etc. The razor sharp focus on returns inevitably has to degrade as they trade growth and scale that dive the stock price.

Apollo: Will continue down the path of becoming the next iteration of GE Capital, a shadow bank that ceases to exist in its prior skin. The focus is on debt, not equity. I think it’s possible that they spin off their equity units as the debt side of the house blots them out from the sun.

KKR: They seem like they are playing both strategies that Apollo and Blackstone are pushing. At some point they either commit to go all in on one or be a second rate mixed bag player. Their giant balance sheet virtually guarantees complexity that the market does not like and I expect commentators to harp on the ‘discount to intrinsic value’ for years going forward.

That’s just three of a broader set of public alt firms. But you see my point.