Two items from The Blackstone Group (NYSE:BX) caught our attention during today's research dig…
First, Stephen Schwarzman, the multi-billionaire founder and CEO of Blackstone issued some cautious comments on China's white-hot stock market.
China has a "reach for yield" situation, which is pushing the Shanghai composite steadily higher. This is a similar situation to the U.S. reach for yield that has us concerned about international blue-chip dividend stocks.
In short, Chinese citizens are faced with few options. Interest rates on deposit accounts are extremely low. At the same time, China's longstanding policy does not allow Chinese citizens to convert Renminbi into other currencies. So the only option left for most investors is to plow their money into the stock market.
The chart above is the iShares China Large Cap ETF (FXI), a good proxy for the Chinese stock market. You can see that the market has been moving sharply higher in 2015. This, in spite of the fact that various measures of economic growth in China is slowing.
As a fan of Blackstone, their business model, and Schwarzman's investment expertise, it is comforting to hear that management is not getting carried away with the exuberance in the Chinese stock market. Even though the company has plenty of access to capital, it doesn't make sense to chase as Chinese stocks go parabolic.
Which brings us to our second piece of information.
Today, Blackstone priced $350 million in senior notes, which will not come due for 30 years. The notes carry a 4.45% interest rate, which is an extremely attractive rate for a 30-year duration.
The move by Blackstone likely means one of two things. Either the company is raising capital to take advantage of a specific investment opportunity, or Blackstone is simply taking advantage of the low interest rate environment and raising cheap long-term capital before rates begin to rise in earnest.
Since Blackstone is only raising $350 million (as opposed to a multi-billion dollar offering), it is less likely that the company has a game changing investment in mind for the capital. Still, $350 million in the hands of Blackstone can go far, as the company can invest its own capital in a large investment opportunity and find institutional investors to invest their own capital alongside.
Blackstone has been active on the real estate front, making some large purchases of office buildings this year. In March, the company reached an agreement to buy the Willis Tower in Chicago for $1.3 billion. It would not be surprising to see Blackstone commit a few hundred million of its own capital to make a similar transaction, with a syndicate of institutional investors making up the difference.
The alternative scenario is simply that Blackstone is taking advantage of low interest rates before the Fed begins to raise rates sometime in the next few quarters. This would simply be an opportunistic move by Blackstone to pick up some working capital at a very low cost.
Our expectation is that Blackstone will use the capital for investment opportunities. These opportunities may be on the table right now, or they may come into play in the near future. But Blackstone has shown that the company is willing and able to put capital to work, and the $350 million raised is likely to follow this trend.
Watching For an Entry Point
We've had our eye on Blackstone for some time now, with the hope of setting up an income play on the stock.
The problem has been that the stock has been moving steadily higher for several months without much of a pullback.
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Blackstone has been steadily increasing its assets under management over the last several quarters. And as the company grows assets, its potential earnings also increase.
Private equity companies are able to charge management fees on the funds that they manage, and also collect incentive allocations (essentially a percentage of their clients' profits). And these firms are also able to invest their own money alongside their clients, so they can profit in multiple ways from the company's investment funds.
Today, Blackstone continues to find attractive investment opportunities and the company certainly benefits from nearly unlimited access to capital from its investors.
Blackstone's dividend is variable, based on the company's quarterly earnings. Over the last four quarters, the company has paid dividends of $2.12, which nets out to a 5.1% dividend yield. Presumably, that yield will grow as the company's investments (particularly in real estate) ultimately pay off.
We're watching the stock carefully and will likely set up a bullish income trade on any material pullback.
