Blackstone, the world’s biggest alternative asset manager, reported 4Q18 results on Thursday (31 January), with the firm raising another $38.6bn in the quarter to take its assets under management (AUM) to $472.2bn – slightly below the consensus forecast of $474.4bn. AUM increased by 3.4% for the quarter and 8.8% for the year (fee-earning AUM rose 2.1% YoY, so it is building up dry powder or undeployed capital). For the year, Blackstone brought in $101bn – just below its 2017 record. Distributable income of USc57/share (vs a consensus estimate of USc46/share) was a lot more realisations than expected but is down 42% YoY from $1.2bn, or $1, in 4Q17. Net management fee earnings jumped 20% YoY, while net realisations were down 56% YoY (representing c. 52% of fee earnings for the year vs 78% in FY17).
We note that Blackstone has changed its reporting format and will from 4Q18 use distributable earnings (DE) as the non-GAAP metric it reports, rather than economic net income (ENI). DE is effectively cash earnings, while ENI includes unrealised performance fee accruals (which can add volatility to earnings).
Blackstone remains an asset-raising machine, having had net inflows of $100bn-plus for the second-consecutive year and expecting to increase that number again in 2019. The firm also continued to see demand from investors outstripping its ability to deploy capital. Blackstone is actively raising retail assets and pivoting towards more permanent capital vehicles.
The Group’s main funds were up 10%–28% YoY, in spite of negative returns for most asset classes. We note though that Blackstone values most of the underlying investments based on long-term discounted cash flows (DCFs), so these numbers obviously don’t take into account the significant de-rating we saw in public markets in 4Q18. Although Blackstone enters 1Q19 with some existing realisations lined up, we wouldn’t be surprised if subsequent quarters see slowing realisations (unless markets significantly re-rate again). Blackstone continues to expand into new ventures including life sciences, insurance and infrastructure. The firm is also going back into private lending, where it has already raised $7bn in the past few months.
Blackstone dismissed the panic around leveraged loans, suggesting that the interest coverage is still double the pre-global financial crisis (GFC) levels and defaults are half of historic levels. It also sees very strong demand from investors looking to invest into credit markets. Scale is allowing the Group to expand its operating margin, which now stands at c. 46%, having increased by 1% for each of the past 4 years. The firm has $113bn of dry powder and c. 77% of its AUM are fee earning.
Blackstone sees its underlying portfolio companies in the US growing EBITDA at the high single-digit levels. The firm highlighted that it is still considering converting to a C-Corp structure, but it is in no rush to do this. Lower ratings are obviously making it less attractive.
Blackstone said it is very excited about India and the business is deploying significant capital there in both P/E and R/E. It is continuing to deploy R/E capital into the US tech office space, US multi-family residential and logistics as well as deploying assets into energy and European direct lending. Blackstone also mentioned that the collateralised loan obligation (CLO) market is very much open for business once again.
While this may change once we have the firm’s full financials, currently it seems that the company will continue to grow fee-earning assets in the low double-digit range. The base has a much-lower performance fee element going into 2019, which makes the distributable earnings much more sustainable. The share is currently on a c. 6.5% dividend yield, so if it can grow that at 13% – a very healthy internal rate of return (IRR). However, we do expect the second-half of the year to be more challenging for the business and Blackstone has already suggested that most of the new assets being deployed in 2019 will only contribute to fees from 2020 and, obviously, realisations are likely to be tougher too. While that doesn’t seem to be a reason for concern currently, we note though this is an extremely pro-cyclical, high-beta company.
