Blackstone (BX +1.25%) built a multibillion-dollar business providing institutional investors access to alternative investments, like private equity, hedge funds, infrastructure, and real estate. When the company started raising capital from institutions in the mid-'80s, they only allocated about 3% of their portfolios to alternatives. Today, the average is 25% because institutional investors have found that they can achieve better overall investment performance by increasing their allocation to alternatives.
The leading alternative asset manager believes individual investors deserve the same access to higher returns. That's leading the company to develop products geared toward this segment. The company sees a virtually untapped $80 trillion opportunity in private wealth management. Because of that, it sees lots of growth ahead as it works to capitalize on this opportunity. By bringing more of these assets under its management, Blackstone will be able to grow its fee-based income, which will further support the growth of its 6.2%-yielding dividend.
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Key Data Points
A massive opportunity
At a recent industry conference, Blackstone co-founder and CEO Steve Schwarzman discussed the company's private wealth initiatives. He noted that the company started in the private wealth area about 12 years ago. Schwarzman stated it has since:
Become a big part and a good part of our business. And the reason is that the private wealth market has $80 trillion of money. And very little of it is allocated to alternative assets.
He believes these investors deserve the same access to the superior performance achieved by institutional investors who can access alternative investments. The CEO pointed out that institutions with the "most allocations [to alternatives] tend to have the best performance." Schwarzman doesn't think individual investors "deserve inferior returns to what the institutions are getting. So we decided to make a major push in that area and deliver institutional-type products to the private wealth channels." It has been enormously successful, growing its private wealth assets under management (AUM) to more than $230 billion, a meaningful portion of its $950 billion AUM total. However, that's only a small fraction of the $80 trillion opportunity.
A steady shift toward alternatives
Blackstone and others believe high-net-worth investors will follow institutional investors by increasing their allocations to alternatives as they see the benefits of these historically high-performing investments. Alternatives tend to have a lower correlation to the public stock and bond markets, less pricing volatility, and higher income yields.
In Blackstone's most recent quarterly conference call, Schwarzman pointed out recent research from Morgan Stanley forecasting that private markets' AUM will grow by 12% annually over the next five years. The investment bank sees the fastest growth coming from individual investors. It estimates that high-net-worth investors will more than double their allocation to alternatives in five years to 8%-10% of their portfolios.
Blackstone has seen this shift firsthand. Its private wealth AUM has surged 43% over the last 12 months alone. A big driver has been a flood of capital into its nontraded real estate investment trust (REIT), Blackstone Real Estate Income Trust, or BREIT. The company created that vehicle in 2016 to provide individual investors access to the private real estate market. It has been a smashing success for both Blackstone and investors. BREIT has produced net returns of 13% annually since its inception six years ago, or three times the public REIT index. It has also been less volatile and produces a higher dividend yield than most public REITs. Meanwhile, another vehicle focused on individual investors, the Blackstone Private Credit Fund (BCRED), has generated 8% annual net returns since its inception.
However, there are some drawbacks to catering to individual investors. They tend to get easily spooked when market conditions deteriorate. Blackstone has seen that firsthand this year as investors have pulled money out of BREIT and BCRED. Both funds reached their preset withdrawal limits of 5% in the most recent quarter. While further withdrawals could impact the company's growth and dividend in the near term, Blackstone believes there's a massive opportunity in the private wealth area as individual investors follow institutions by increasing their allocations to alternatives.
Blackstone's strategy should continue paying big dividends
Blackstone sees an enormous opportunity to provide individual investors with access to institutional-quality alternative investments. It has already started to capitalize on that opportunity and sees much more potential. While individual investors are less steady than institutions, Blackstone believes this focus will continue paying off as it should drive strong AUM and fee-based income growth in the coming years. That should enable the company to continue paying big-time dividends to its investors.
