When Blackstone (NYSE:BX) went public in June of 2007 at $31, it seemed as if the founders had top-ticked the global markets. Shares priced at $31 opened higher and closed that day close to $35. Shares never closed that high again, dropping over 80% in the spring of 2009 to $4, much worse than the 55% the S&P 500 plummeted over the same time. Now, with the S&P 500 down about 12% from the day of the BX IPO, and Blackstone still down 50% from its first day of trade, shares look like a bargain.
BX is a limited partnership comprised of three segments: Private Equity, Real Estate, and Credit & Marketable Alternatives (CAMA). While Blackstone's Private Equity division is what it is best known for, it accounts for only about a third of both Revenues and Economic Net Income (ENI) for 2010. Real Estate is the largest both in terms of revenue and ENI, and CAMA is third in ENI.
Blackstone's business essential works like this: The company raises large investment funds from wealthy individuals, organizations, and pension funds, with a set fee for managing the money as well as a percentage of the profits. Blackstone had Assets Under Management (AUM) of $128.1 billion at the end of the year, including $30 billion in uninvested money, referred to as "dry powder." Access to the fund also comes with a long lock-up period, so there is no threat of investors rushing to pull money out of Blackstone should the economy turn south. The most recent fund has raised $14.7 billion, and the company expects it to reach $15 billion by the spring.
The ability to raise that amount of money over the last two and a half years is a huge testament to the faith investors have in the company. It also means that Blackstone can take advantage of its ability to grow without the threat of issuing new shares, which is a concern for most partnerships.
Assuming Blackstone matches last year's pace and invests another $10 billion this year, that should lead to a 10% increase in fees earned, not including any return on the actual investment. Blackstone's ability to carry this "dry powder" keeps its options open to almost any kind of deal. It doesn't matter if it's providing funding for General Growth Properties to exit bankruptcy, or buying BankUnited (NYSE:BKU) from the FDIC and then bringing it public, or buying industrial properties from ProLogis (NYSE:PLD); if there is an opportunity to make money, Blackstone is there.
The firm actively acquired assets during the downturn, and is just now starting to reap the rewards of higher values. Its Real Estate and Private Equity assets' carrying values are currently at 1.4 and 1.5 times what investors originally put in, and those numbers will continue to rise as the economy accelerates.
The resurgent IPO market is also a positive for Blackstone. The company recently filed to IPO Freescale Semi, which it helped take private in a 2006 LBO. A functioning IPO market will allow Blackstone to exit previous LBOs, and return more capital to investors or re-deploy the money to new investments. Either way, a stronger IPO market means higher prices for IPOs, and better returns for Blackstone.
Admittedly there are reasons the shares are trading at a discount, although none that are of great concern. First and foremost, attempting to read the quarterly and annual reports is confusing. The company reports ENI, Distributable Earnings, GAAP results, and AUM as guideline numbers to watch -- much more difficult to understand than the standard Revenue and Profit number of a normal company.
As if the somewhat new metrics were not enough, ENI came in at $1.4 billion for 2010, while GAAP results show a loss of $370 million, tied to IPO and acquisition costs ... so a quick glance at the wrong number can give you a very different view of the company.
The distribution policy is also unique, with majority of the yearly distribution being paid out in the fourth quarter. This is because the distributable earnings are hard to predict, so the growth of the distribution is somewhat foggy. In 2010 distributions paid were $0.10 for the first three quarters, and $0.32 for the fourth quarter, for yearly distributions of $0.62.
With the shares recently trading around $17.70, the company commands a $7.45 billion market cap. Back out the $580 million cash on the balance sheet at the end of 2010, and you get a $6.87 billion market cap. Take into account the 2010 ENI of $1.4 billion and the Distributable Earnings of $702 million, and shares look cheap at 4.9 times ENI and 9.7 times Distributable Earnings. Combined with the $0.62 dividend (3.5%) yield, and investors will be paid to wait for the market to wake up to Blackstone's potential.
At the same time, owning units gives you the ability to profit from the success of private equity firms without needing the millions and millions of dollars, or the long lock-up periods. The company's assets continue to increase in value as the economy picks up, and stronger capital markets will allow Blackstone to further leverage the $30 billion of dry powder it still has to invest. Converting that dry powder into investments will further hasten the distribution growth for years to come, which will also help support the shares. Look to add to positions on any weakness following the fourth quarter distribution payment at the end of March.
Disclosure: I am long BX.