Better High Yield Asset Manager Buy: Carlyle Group Vs. Blackstone

Summary

• Carlyle Group and Blackstone are world-class global alternative asset managers.
• Both boast investment-grade balance sheets and shareholder-friendly dividend payout models.
• We look at CG and BX stocks side-by-side and share which one we favor at the moment.
• Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »

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The Carlyle Group Inc. (NASDAQ:CG) and Blackstone Inc. (NYSE:BX) are world-class alternative asset managers that boast investment grade balance sheets and shareholder-friendly dividend payout models. In this article, we will compare them side-by-side and share which one we favor at the moment.

Carlyle Group vs. Blackstone: Business Models

Both businesses have substantial assets under management, with CG's AUM standing at $376 billion and fee-earning AUM at $260 billion and BX's AUM standing at $940.8 billion and fee-earning AUM at $683.8 billion.

CG's permanent fee-earning capital is at $58 billion (22.3% of fee-earning AUM), whereas BX's permanent fee-earning capital is at $355.9 billion (52.0% of fee-earning AUM).

CG invests in three primary areas: Global Private Equity (which includes investments in real estate, infrastructure, and energy), Global Credit (a diversified liquid and illiquid lending portfolio), and Global Investment Solutions (providing unique investment products to clients via fund of funds, and secondary portfolio purchases). Its largest segment is Global Private Equity, with Global Credit coming in second, and Global Investment Solutions coming in third.

BX, meanwhile, invests the vast majority of its funds across three platforms - real estate, private equity, and credit and insurance - with a much smaller amount invested in hedge fund solutions.

Both asset managers apply a similar model of raising capital for their various funds and permanent capital vehicles and then extracting both base management fees as well as performance incentive fees from those funds. As a result, they generally outperform during economic booms and underperform during economic downturns as the performance incentive fees contribute to a rather lumpy earnings profile.

While BX gets the slight edge here due to the fact that a much higher percentage of its fee-earning assets under management are permanent in nature and its superior scale affords it economies of scale and some networking advantages, both business models are quite competitively advantaged in the alternative asset management space.

Carlyle Group vs. Blackstone: Balance Sheets

Both CG and BX have very strong balance sheets, with CG earning an A- (stable outlook) and BX earnings an A+ (stable outlook) from S&P. Moreover, both firms have a constant stream of fresh liquidity pouring in via their strong fundraising. As a result, there is very little risk of either facing financial distress anytime soon and in fact both have plenty of capacity to respond opportunistically to an economic downturn. Once again, we give the slight edge to BX here by virtue of its superior credit rating but acknowledge that this is an area of strength for both businesses.

Carlyle Group vs. Blackstone: Growth Potential

Both have been generating very strong assets under management growth in recent years, which in turn is driving strong earnings and dividend growth. For example, this year CG is expected to increase its dividend per share from $1 in 2021 to $1.29 in 2022, and further grow that dividend per share to $1.73 in 2024 (a 15.8% CAGR). Meanwhile, BX is expected to grow its dividend per share from $4.06 in 2021 to $4.43 in 2022. Its dividend per share is expected to increase to $6.10 in 2024 (a 17.3% CAGR). Meanwhile, CG's normalized earnings per share is expected to grow at a 9.8% CAGR over the next two years and BX's normalized earnings per share is expected to grow at a 16.9% CAGR over the next two years. As a result, once again, while both have strong growth outlooks, BX gets the edge here.

Risks And Catalysts

Both businesses are positioned to deliver strong long-term returns across business cycles, but investors should take note that in the event of a sharp economic downturn they will likely underperform the broader market. This is due to the fact that a meaningful percentage of their distributable earnings come from performance incentive fees. If the global economy is in a protracted recession, asset prices will likely be suppressed, eliminating or at the very least significantly reducing performance incentive fees. In addition, weak economic sentiment generally leads to less liquidity in the private markets and also hurts fundraising for alternative asset managers.

That said, both have pretty significant liquidity and very strong balance sheets at the moment, so they are well positioned to weather a downturn and respond opportunistically by purchasing assets on the cheap. We therefore expect that - while a downturn will undoubtedly harm their results in the short-term - economic challenges will likely provide both companies with the chance to set themselves up for even further riches over the long-term.

Carlyle Group vs. Blackstone: Track Record

BX dominates when it comes to track record:

Data by YCharts

Even in recent years, BX has emerged as the clear winner between the two:

Data by YCharts

CG vs. BX: Stock Valuation

While BX is the clear winner in terms of growth potential and track potential and earns a slight edge in terms of business model strength and growth potential, CG looks much more favorable on a valuation basis:

Metric	CG	BX
P/FRE (most recent quarter annualized)	25.5x	28.3x
P/DE (YTD annualized)	11.1x	15.6x
Dividend Yield	4.35%	4.39%

Click to enlarge

Investor Takeaway

In the comparison of BX and CG, it comes down to a few key differentiators. BX is a much larger bet on real estate whereas CG is a much larger bet on lending. Both have similar (minority) exposure to infrastructure and private equity as well as hedge fund/investment solutions. BX wins on all of the quality metrics such as track record, economies of scale, permanent capital percentage of fee-earning assets under management, balance sheet strength, and growth outlook. Meanwhile, CG is still pretty solid on the quality metrics, but trades at a discount to BX.

For us, while CG is a pretty attractive alternative asset manager overall and we rate it a Buy, we prefer BX at the moment (and also rate it a Buy). Its premium to CG is quite minor, and its superior track record and percentage of permanent capital are overwhelming.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.