by Tom Taulli | May 22, 2013 2:15 pm
The Blackstone Group‘s (BX) relatively short publicly traded history has been filled with pretty exaggerated highs and lows.
Blackstone went public in June 2007 with a massive deal, selling 133.3 million shares at $31 each. However, this point in time proved the top of the private equity bubble as the financial crisis froze nearly all dealmaking, and less than two years later, BX shares traded below $4.
Since then, the firm has reinvented itself, and the stock has rebounded in kind, nearly quadrupling since the financial-crisis lows and even doubling within the past year.
The question now is: Should you buy Blackstone with the thought that it’s well on its way to finally reaching and surpassing its IPO price, or has it run out of room to grow? To see, let’s take a look at the pros and cons.
Secular Trends: Institutional investors essentially have one job: make market-beating returns. But in a low-interest-rate world, they have little choice but to look at alternative investments such as private equity, real estate and hedge funds. BX is one of the world’s top players in this space, having raised $96 billion in the past two years alone — more than the combined total for its four closest rivals. A key to BX’s success is that it can impact the outcome of its investments. One such case was the PBF Energy (PBF) buyout. Back in 2010, BX formed this entity to acquire bankrupt refineries. The firm then renovated the infrastructure, got help from state governments and renegotiated labor and customer contracts. It turned out to be a winning strategy when BX took PBF public and snagged a hefty 5X return.
Harvesting: When markets get into bull mode — which certainly is the case now — BX gets aggressive in unloading its assets, such as through sellouts or public offerings. In the past year, Blackstone has generated a cool $17 billion in realizations from 115 transactions including deals like SeaWorld (SEAS) and Pinnacle Foods (PF). Thus, if this momentum continues, BX could be poised for a surge in earnings.
Real Estate: This should be a strong driver for Blackstone, which has averaged a net return of 16% in its real estate investments in its 20 years in this field. Since the financial crisis, the firm has invested $23 billion in real estate. It even purchased 26,000 homes, and has already rented 85% of them. During the past few years, BX benefited from the low valuations and was able to invest large amounts to renovate its properties. Now, with overall supply low in the real estate market, the pricing environment has rebounded — which should lead to ample returns.
Capital Markets: Blackstone wants a healthy market, and we’ve got one now, but a number of looming issues could change that. Perhaps the biggest risk is the eventual winding down of quantitative easing (though the Fed is making sure to slowly prepare us for it), though another economic implosion in Europe or an accelerated slowdown in China could be enough to knock this lofty market off its footstool.
Regulation and Taxes: Private equity firms like BX have benefited from lucrative tax advantages. However, in light of the budget deficits in the U.S., there has been pressure to change things on this front. Private equity also has been subject to fairly light regulation, but there’s worries that in the next few years, Congress might introduce new laws to impose more onerous restrictions. This seems more likely given the fact that a variety of top PE firms are already publicly traded and are even introducing products geared toward retail investors.
Management: BX is a complex organization, with footprints in disparate businesses and operations that span the globe. Its private equity segment, for instance, is comprised of 75 companies that generate $109 billion in revenues, and it employs close to 750,000 people. Combined, it would represent the 17th largest company in the world. Managing this is no easy feat, so there’s always the risk that BX becomes too bureaucratic and can’t be nimble enough to respond to competition.
BX is fairly unique among alternative investments. It has a massive scale, with $218 billion in assets under management, and it sports dominant positions in several investment classes thanks to decades of experience and top-notch management.
It’s also creative, as illustrated by its lead role in the construction of a Ugandan dam that now generates about half the country’s electricity, and that should be a strong source of long-term recurring cash flows. And all Blackstone needed to deal with was complex politics, tribal groups and even marauding pirates. You know … the usual.
Blackstone also is reasonably priced despite its extended run-up, with shares trading at about 9 times fiscal 2014 earnings.
So should you buy Blackstone? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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