Does the stock market have you nervous, or at least frustrated that you can’t find any names you really want to sink your teeth into? You’re not alone.
Although most of the financial media’s talking heads are singing the same bullish song, there’s been a suspicious lack of volume behind the recent bullish thrusts. Not everybody’s buying it — literally and figuratively. Stocks are just too much of a liability to really dive into here.
Want a suggestion for an alternative to stocks? How about private equity firm Blackstone Group LP (NYSE:BX)? BX stock may look, feel and act like a typical equity investment, or at least a mutual fund. It’s very much something else, though.
The term “private equity” can mean more than one thing, but generally speaking, it’s just a vague reference to investments in companies outside of ownership of publicly traded equities.
Most of the time (though not all the time) there’s a debt-based element or loan involved, but more important to current and prospective owners of private equity (PE) investments, the PE firm itself takes an active role in its portfolio companies’ success.
Blackstone Group is no exception to this paradigm. Case in point? Last week the fund agreed to acquire the Center for Autism and Related Disorders (CARD), which offers institutional, school-based and home-based autism therapies all across the nation.
It’s not your typical business model, and while details about CARD are scant, it’s not likely to be a big enough venture to ever merit an IPO. It’s an opportunity that works well for Blackstone, though, largely because Blackstone’s managers won’t avoid putting the wrong kind of short-term minded pressures on the company the average horde of retail investors might.
Just a few days before that, Blackstone Group supplied the $1.8 billion loan that will ultimately build a high-end office building — called the Spiral — in New York. It’s not ownership of the building per se, but it does align the fund’s interest with the owner that will be renting it out.
It’s also not exactly the kind of investment you’ll find by using your typical stock screener.
And for the record, BX stock doesn’t necessarily have a lock on all the oddball stuff you’d like to invest in but can’t. KKR & Co. L.P. (NYSE:KKR) has a vested interest in fantasy sports website FanDuel. Ares Management LP (NYSE:ARES) owns InsightGlobal, which is an IT staffing firm.
These are all good, money-making ventures. They’re just not ventures readily and directly available to the public.
One downside of investing in this type of holding company is that you don’t get to pick what goes into or out of the portfolio. There’s also no capital appreciation to speak of like there is with a fruitful stock trade, since there is no underlying stock to serve as the basis for a valuation.
The only meaningful value of a private equity firm’s portfolio is the cash those companies contribute to the PE firm’s bottom line.
That may be enough, though. The dividend yield of 11.1% Blackstone stock currently sports is better than the average annual return many investors have been experiencing for a long, long time now.
The only catch with these private equity firms and their closely related cousins, business development companies, is, are the dividends sustainable? They usually are, in the long run. For some poorly managed PE funds, though, things can sometimes get a little too tight.
Fortunately, Blackstone Group is a better-run private equity firm than most.
Bottom Line for BX Stock
Don’t hear the wrong message. Though it’s distinctly “something else,” BX stock can and often does move in tandem with the broad market, for better or worse.
Investors can at times more or less perceive it like a stock — and treat it as such — even if those investors innately know it’s not an equity per se. Other times, dividend-oriented private equity investments and business development companies are treated like bonds.
But given enough time, the market will appreciate that at the very least, it doesn’t have to play the full valuation/pricing game with a holding in BX stock. The company’s value, in the end, is about the cash it can dish out, which remains largely unaffected by equity prices.
That’s one less thing an investor has to factor into the decision-making regimen.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.