How Investors Can Win When Blackstone Group LP Crushes Earnings

Blackstone Group LP (NYSE: BX  ) was a great performer in 2013, with the stock almost doubling in price last year. So what have they done lately?

Blackstone announced economic net income, or ENI, of $1.15 per share for the quarter ending June 30, 2014 -- up 89% compared to the same time period last year. Blackstone ENI for the past 12 months was a record $4.3 billion. Now that's a strong quarter!

Here's a quick look back at how publicly traded private equity firms performed last year.

One thing investors should keep in mind is that private equity is patient capital, so earnings, or ENI, can be lumpy from quarter to quarter, or even from year to year.

The Blackstone business model
Private equity firms are basically alternative asset managers. Rather than manage a portfolio of stocks and bonds for wealthy investors, private equity firms are best known for leveraged buyouts, or LBOs.

Blackstone Group has a much broader focus than just LBOs and is organized into five major segments:

  • Private Equity-multiple funds collectively called the Blackstone Capital Partners, or BCP, plus Tactical Opportunities and Strategic Partners Fund Solutions -- with a total AUM of $66.1 billion.
  • Real Estate-domestic U.S. real estate investments as well as international funds are rolled up into Blackstone Real Estate Partners, or BREP, funds -- with a total AUM of $81.3 billion.
  • Hedge Fund Solutions-is referred to as Blackstone Alternative Asset Management, or BAAM, with a total AUM of $58.3 billion.
  • Credit-distressed debt funds, mezzanine funds, and general credit-focused funds concentrated in the LBO arena are all managed by Blackstone subsidiary GSO Capital Partners LP, with a total AUM of $66 billion.
  • Financial Advisory-provides fee based restructuring, reorganization and financial advisory services. Additionally, Park Hill Group provides fund placement services for alternative investment funds.

The assets under management, or AUM, are as of March 31, 2014 according to Zacks Investment Research.

Private Equity hits a key milestone
Until a Blackstone private equity fund reaches a certain agreed upon level of performance, or preferred return hurdle rate, Blackstone is not entitled to receive a significant portion of its fee compensation. During the quarter ended June 30, 2014 the BCP V Fund crossed over that milestone, an event which resulted in a 296% increase compared to the prior quarter.

Real Estate continues to lead the way
This business segment alone accounts for an incredible $80 billion of AUM. If Blackstone's real estate holdings were held by a REIT, it would be the largest REIT in the world.

How to invest alongside the smart money
Blackstone has recently sponsored several real estate IPO's including: Hilton Hotels Worldwide (NYSE: HLT  ) , and Brixmor Property Group (NYSE: BRX  ) . Blackstone continues to hold shares in both of these publicly traded companies which gives it flexibility in realizing gains by deciding when to sell more stock.

Blackstone also has the option to hold on to these shares to continue to enjoy the success of these sponsored IPOs. During the conference call, Blackstone revealed that it is holding on to all of its Hilton shares to take advantage of the price appreciation. In the past quarter, Hilton stock has posted an impressive ~11% gain. Blackstone has chosen to borrow $2 billion against the Hilton shares for liquidity, rather than sell them at this time.

Likewise, shopping center REIT Brixmor has performed well so far this year, along with its peers Kimco Realty, DDR Corp, and Regency Centers. These retail REITs primarily own grocery anchored neighborhood shopping centers . This retail segment appears to be fairly resistant to threats from e-commerce. Brixmor shares have increased in value ~17% during the first half of 2014.

Blackstone real estate strategies moving forward
Here are some of my takeaways from the Blackstone earnings conference call:

  • Global focus-approximately 50% of new investments may be outside of the U.S.
  • Invitation Homes-Blackstone's multi-billion single-family rental business was the dog that didn't bark. No discussion, or analyst Q & A.
  • The Opportunity, or Buy it, Fix it, Sell it, high-yield segment is simultaneously buying new assets while realizing gains on more seasoned assets.
  • Core Plus, a relatively new initiative, will likely be a $5 billion segment this year. It targets more traditional real estate opportunities with lower target returns in the 10% to 12% range.

Although Core Plus is currently dwarfed by the $80 billion AUM Opportunity segment, Blackstone believes over a 10 year time horizon this newer asset class alone could grow to $100 billion AUM.

Blackstone can pounce on a moment's notice

Investor takeaway
Blackstone Group LP shareholders benefit from fees derived from all of its business segments. Investors can also choose to invest alongside Blackstone when it chooses to realize gains through sponsoring IPOs. One reason it is clever to buy when Blackstone is selling, is that the firm retains a major chunk of each of its IPOs, and continues to have skin in the game.

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