Blackstone: A Blue Chip in Private Equity

06/17/2019 5:00 am EST

Focus: FINANCIALS

John Freund

Income Specialist, Todd Shaver's Bull Market Report

With institutional capital’s flight from hedge funds into the private equity sector, expect blue chip firms like Blackstone (BX) to continue to increase raise enormous funds, suggests John Freund, income and growth specialist and editor of BullMarket Report.

The $48 billion private equity firm announced the purchase of $19 billion of warehouse facilities from Singapore-based GLP, which nearly doubles the size of its industrial real estate portfolio.

This move illustrates management’s belief in the continued prosperity of the e-commerce and direct-to-consumer retail markets. Industrial real estate is considered a part of the logistics chain for e-commerce delivery. Blackstone is making a big bet that e-commerce will continue to thrive, and why shouldn’t it?

The retail-apocalypse is in full swing, and with an estimated 25% of malls expected to close by 2022 according to analysts at HSBC, e-commerce is expected to rise to 35% of total retail sales by 2030 (e-commerce made up just 17% of total sales in 2017).

The company hasn’t been shy about expanding its real estate portfolio. Just a few weeks ago, Blackstone announced a $5 billion fundraise with the aim of investing in real estate debt.

This will be the fourth real estate debt-focused fund the company has churned out. This comes on top of the $20 billion commercial real estate fund the company is raising — the largest ever for a real estate fund of any kind.

With 2:1 debt-to-equity purchasing power, Blackstone will control $60 billion of real estate investment. The company already boasts a 16% annualized return on its real estate portfolio, so why shouldn’t it look to beef up that business segment?

Perhaps even more significant was management’s recent decision to transition into a C-Corporation from a publicly-traded partnership. The move takes advantage of recent changes in the U.S. tax code, and allows many institutional investors such as index funds and ETFs who typically don’t invest in partnerships to hold shares.

In fact, 60% of ETFs and index funds are currently restricted from owning partnerships. As a result, institutional ownership — which sits below 40% — will likely increase substantially once the change goes into effect on July 1.

Rival KKR & Co. (KKR) made the same transition recently, and it was expected that Blackstone would follow. Investors cheered the news by sending the stock higher, even as the rest of the market was cratering in early-mid May.

Blackstone’s financials are also rock solid, with 1Q19 producing $2 billion in revenue, a 15% YoY increase. Blackstone has also been growing assets under management (AUM), with $43 billion additional assets last quarter, for a grand total of $510 billion.

That represents a 14% increase from the prior year’s first quarter total. AUM is important, since private equity firms earn fees on the assets they manage. So the larger Blackstone’s AUM, the more top-line fees it generates.

The C-Corp transition has already provided the stock with a nice short term boost, and we expect even more to come as institutional investors pile in. But it’s the company fundamentals and positive industry outlook which will keep Blackstone in the black for the rest of the year. 

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