Roman Tiraspolsky Shares of Blackstone (NYSE:BX) have seen a very strong performance in 2023. By mid-December, I noted that there were some cracks in the empire which has been on fire in recent years. Redemption limits at the core BREIT caused pain, perhaps more on the reputation than the actual results itself, as Blackstone was well-positioned to ride out the volatility amidst a rock solid balance sheet and strong management track record. At the same time, I concluded that its business model had some flaws, well understood by Blackstone which might be aggressive in investments for its clients, yet it is a conservative manager with its own balance sheet. A Small Recap Blackstone is an investment manager which is active in a wide range of investments, having an above-average focus on infrastructure and real estate, as the company has been a huge player in real assets which has been somewhat helpful in an inflationary environment. Pre-pandemic, Blackstone generated $7.3 billion in revenues in 2019, split roughly half between management fees and investment (performance-related) income on half a trillion in assets. Operating profits of $3.8 billion worked down to 50% margins, with net earnings posted at $2.0 billion after a relatively large minority interest. Revenues fell to $6.1 billion, as increased assets under management increased the fixed fee portion of income, more than offset by lower performance related income, for obvious reasons. 2021 was the boom year, even as fixed management fees only rose from $4.1 billion to $5.2 billion, with investment income exploding to $16.8 billion. Net earnings to (Blackstone) shareholders came in at $5.9 billion, equal to more than $8 per share. Assets under management rose to $881 billion, following capital gains and an astonishing $271 billion in inflows, with the business thriving on real estate, private equity, and to a smaller extent hedge funds solution, among others. With shares peaking at $150 in November 2021, and earnings per share trending around $8 per share, Blackstone fetched a market multiple based on peak conditions, albeit that the balance sheet traditionally shows a big net cash position (at the time near $10 billion). Through December 2022, shares had lost nearly half their value, trading at $78 per share. The company has seen continued increases in management fee income on the back of assets under management nearly breaking the trillion mark, with inflows measuring $183 billion in the first three quarters of the year, including a $45 billion inflow in the third quarter. The variable revenues component fell to $6.8 billion as Blackstone has taken some losses itself as well as co-investor in certain investments, as notably these principal investments (and reversal on the income hereon) mean that earnings only came in at $1.2 billion in the first nine months of the year, after a break-even result was posted in the third quarter. Hence, earnings only were reported at $1.61 per share, or at $4.29 per share if volatile principal losses are excluded. The issue was that there were some dark clouds on the horizon as privately held assets, poor liquidity and a retracement in valuations create for a tough combination. This actually mean that Blackstone had to halt redemptions at its core BREIT fund which measured $70 billion through the third quarter, with redemptions limited at 2% per month. That caused some bad publicity and some nerves among others, even though the biggest concerns have been alleviated by a strong quality portfolio, a recent decline in interest rates, recovery in end markets and indexation being applied to rental contracts. So the biggest risk in December appeared to be reputation more than direct business impact, as the biggest P&L impact on the business is simply overall asset performance, while the performance over the past years remained very impressive. Hence, I advocated a buy the dip strategy in the low- to mid-seventies as I picked up a few shares at $75 early in January. A Boom Month Since the start of the year, shares have rallied from $75 to $95 per share, a more than 25% performance in a rather very short period of time. Good news started early in the month as Blackstone announced that UC Investments will invest $4 billion into the flagship BREIT fund. By mid-month, closed on the Strategic Partners IX fund, in a huge $25 billion fund raise. Toward the end of the month, the company posted resilient fourth quarter results, even as inflows moderated to $43 billion, still an enormous amount of about half a billion each calendar day, with total assets under management jumping to $975 billion. The company posted a fourth quarter earnings number of $0.75 per share, marking earnings for the year at $2.36 per share. BREIT stood at $68.5 billion through the end of the quarter, likely at its redemption limit, as new inflows in January might create an uplift again, as the question is what the backlog of selling pressure is for this specific (group of) funds. Net cash holdings, defined in a slightly other way in the case of Blackstone, totaled $7.8 billion, equal to about $10 per share. With the wider S&P 500 up a solid 6-7% in the first month of the year, the outlook for the first quarter looks quite reasonable, setting the company up for a stronger quarter, if markets continue to trade near these levels in March of course. Having initiated a small position early In January, I find myself performing a balancing act. A more than 25% return in fewer trading days marks huge outperformance as the run higher has outpaced the fundamental performance, in my view. Given all this, I am happy to take some profits here, as the re-rating has been quite pronounced.
