What happened
Shares of Blackstone (BX +4.38%), the largest alternative asset manager in the world, saw its stock fall 16.8% on the week.
While the private equity, real estate, and hedge fund giant announced two large transactions in the Indian market, it was likely the hawkish commentary from Federal Reserve officials that sent shares down, along with basically all other financial stocks.
NYSE: BX
Key Data Points
So what
On Thursday, Blackstone had two big announcements. First, its private equity segment announced it would be acquiring R Systems, a publicly traded technology consulting firm based in India, for $359 million, or a little less than two times sales. R Systems serves over 250 clients in the tech, media, and financial services industry globally and will now operate under Blackstone as a private company for the time being.
In addition to this purchase, Blackstone also announced it was filing for an initial public offering (IPO) of its Indian mall property Real Estate Investment Trust (REIT). The company, called Nexus Malls, owns 17 malls across 14 Indian cities. While some are concerned with global consumer spending, Nexus' occupancy rate is 94%. Of note, it appears as though Blackstone is only set to sell about 10% of the company to the public markets, based on an anticipated $300 million sale on a valuation of around $3 billion, according to insiders.
Still, it likely wasn't these transactions that caused Blackstone's stock to drop this week. After all, $600 million or so of transactions doesn't move the needle that much for Blackstone, which had more than $950 billion in assets under management as of last quarter.
More likely, Blackstone sold off with other financial stocks and asset managers due to this week's parade of Federal Reserve officials, as it appeared each Fed governor attempted to sound more hawkish than the last to dampen the market's enthusiasm following last week's softer-than-expected inflation report. The trend continued Thursday, with Fed Governor James Bullard giving a particularly concerning forecast of raising the Federal Funds rate to between 5% and 7% next year.
Blackstone would be impacted by higher interest rates in multiple ways. Its private equity wing uses debt to buy out companies before improving them, paying down that debt, and then reselling the assets years later at a profit. Obviously, higher rates have the potential to make debt-fueled buyouts less profitable and could hurt the value of Blackstone's assets acquired in earlier years. The same goes for Blackstone's real estate empire, although real estate is generally regarded somewhat as an inflation hedge, assuming Blackstone can raise rents along with inflation to compensate for higher rates. That's an open question, though, especially as the Fed appears to be attempting to get real estate prices and rents down.
Now what
Blackstone is by no means alone in being harmed by the near-term spike in interest rates; however, it's a terrific company that has become the largest alternative asset manager in the world for a reason. Importantly, Blackstone has a premier fundraising engine and can usually raise funds when asset prices go down -- a luxury not all fund managers have. In fact, despite the tumultuous markets, Blackstone saw $338 million in inflows from investors over the past 12 months.
While Blackstone's hefty 5.3% dividend can rise or fall based on when it sells assets and for how much, its fee-related earnings, in which it earns more consistent management fees on its assets, add some stability to earnings -- that is, as long as the company continues to raise and deploy capital. For instance, last quarter saw lower realizations and lower distributable earnings, but fee-related revenues were up about 50% over the prior-year quarter, putting a nice floor under the cash dividend.
Blackstone remains a high-quality dividend stock and among the best publicly traded asset managers around. Dividend investors should take advantage of any macro-related downturn to potentially add this high-quality brand to their portfolios.
