Blackstone (BX -1.60%) is a phenomenal investor. The company showcased its prowess last year. While it was one of the worst years for investors in decades, Blackstone's clients saw differentiated results.
CEO Steve Schwarzman highlighted the company's differentiated results on its fourth-quarter conference call. Here's a closer look at how much better its alternative investment funds performed compared to the public stock and bond markets. Those stunning results should lead investors to give it more of their money to manage in the future, which should grow the firm's value for shareholders.
It was a great year to be a Blackstone client
Schwarzman led the call by noting that "2022 represented the most challenging market environment since the global financial crisis." Central banks aggressively fought inflation, which spiked to the highest level in decades. The CEO pointed out, "In the United States, we saw the highest level of inflation since 1981. Federal funds rate here rose from basically zero at the start of the year to 4.5%, the largest increase in 50 years."
This significant surge in inflation and interest rates had a devastating impact on public markets. Schwartzman noted that:
Equity markets fell sharply as a result, with the S&P [500] down 18% for the year, Nasdaq down 33%, public REIT index, not to be forgotten, down 25%...In credit, the high yields and high-grade indices declined 11% and 13%, respectively. Overall, the 60-40 portfolio had one of the worst years on record.
Despite these extremely unfavorable market conditions, Blackstone delivered differentiated results for its clients:
|
Strategy |
4Q'22 |
FY'22 |
|---|---|---|
|
Real Estate Opportunistic |
-2% |
7.1% |
|
Real Estate Core+ |
-1.5% |
10.3% |
|
Corporate Private Equity |
3.8% |
-0.6% |
|
Private Equity Tactical Opportunties |
0.6% |
-1.3% |
|
Private Equity Secondaries |
-1.8% |
8.5% |
|
Private Credit |
2.4% |
7.4% |
|
Liquid Credit |
3% |
-2.5% |
|
Hedge Fund Solutions |
2.1% |
5% |
Data source: Blackstone.
The significant outperformance compared to public markets led clients to entrust it with more of their money. The company recorded $43.1 billion of fund inflows in the fourth quarter, bringing its 2022 total to $226 billion for the year. That helped grow its total assets under management (AUM) by 11% to $947.7 billion. This translated into solid profit growth. Blackstone delivered a 9% increase in fee-related earnings to $4.4 billion, while total distributable earnings rose 7% to $6.6 billion. That enabled the company to pay out sizable dividends.
Blackstone even became a victim of its own success last year. The company saw a surge of redemption requests for its non-traded REIT (Blackstone Real Estate Income Trust or BREIT) and its private credit fund (BCRED) as some investors sought to cash in their profitable investment to cover losses incurred elsewhere. However, even in the face of an uptick in redemptions, Blackstone's inflows exceeded outflows.
Blackstone's returns will continue drawing investors
Blackstone's success last year further enhanced its already sterling brand reputation. That's leading clients to entrust it with more of their funds. For example, the University of California (UC Investments) recently agreed to significantly expand its relationship with Blackstone. For over a decade, UC Investments had invested $2 billion in Blackstone funds. However, the institutional investor agreed to buy $4 billion of BREIT shares that it would hold for six years following news that the vehicle saw an uptick in redemptions from retail investors. UC Investments subsequently agreed to boost that investment by $500 million. It made that investment because it believes BREIT has one of the best-positioned real estate portfolios in the country. These investments are a big vote of confidence in Blackstone and its investment products.
The company should continue to see strong fund inflows as more investors increase their allocations to alternatives. Global private capital AUM will double by 2027 to $18.3 trillion, according to Preqin, a leader in data for the alternative investment sector. While large institutions like pension plans and sovereign wealth funds will remain the largest investors in alternatives, high-net-worth individuals will increasingly allocate more of their portfolios to alternatives.
Blackstone is a first mover to capitalize on the massive retail investor market opportunity. It created BREIT and BCRED to provide high-net-worth investors access to high-quality private investments. As the UC Investment's purchases showcase, BREIT is truly an institutional quality investment. Meanwhile, the returns for that product speak volumes. Schwartzman pointed out on the call that:
BREIT has delivered 12.5% net returns annually since inception six years ago...earning over three times the public REIT index...In 2022, BREIT's net return was over 8%, while equity and debt markets were melting.
Those differentiated returns have made the product a magnet for investors in recent years. That likely continues in the future.
Boosting its sterling reputation
Last year showcased the power of the Blackstone brand. The alternative investment manager delivered superior performance in one of the worst years for investors in decades. That further enhances its brand reputation, which should draw even more investors to entrust the firm with their capital in the future. It positions the company to continue growing value for its shareholders over the long term.
