Shares of Blackstone (BX -1.60%) have taken a beating during the current bear market. The stock has lost about 30% of its value from the peak early last year. A big weight has been concerns about its growth prospects because of mark volatility and an uncertain macroeconomic picture. The company has already experienced growth headwinds for its core retail product, non-traded REIT BREIT, which saw a surge in redemption requests.
However, as the company looks ahead, it sees an enormous growth opportunity. Blackstone's management team discussed its long-term growth drivers on its fourth-quarter conference call.
Setting the stage
Given the company's near-term growth headwinds, an analyst on the call asked the company to provide a big-picture overview of future growth. COO John Gray answered by first giving an overview of the opportunity in alternative investment management. Gray stated:
I think there is still enormous opportunity in the alternative space. When you look at it aggregately, it's roughly a $10 trillion industry. We're about 10% of the industry. That compares to stocks and bonds over $200 trillion. If you throw in commercial real estate, residential real estate, other things, you can get up to $300 trillion. So, I think there's a lot of room to grow.
Over the years, investors have been steadily allocating more of their portfolios to alternatives like private equity, real estate, infrastructure, and credit. That's because alternatives have historically delivered higher returns with less volatility than the public stock and bond markets.
This shift toward alternatives should continue. Research and analytics firm Preqin estimates that the alternatives sector will nearly double in size by 2027 from $9.3 trillion last year to $18.3 trillion. This forecast implies the market will grow at an 11.9% annual pace.
While institutional investors like pension and sovereign wealth funds have been growth drivers for alternatives, retail investors are beginning to increase their allocation as more products become available to that group. Blackstone has led the way by creating retail-focused products like BREIT to provide high-net-worth investors with access to institutional quality private investments. That's because it sees a massive opportunity in this investor group.
What will drive Blackstone's growth in the future?
Gray then discussed where he sees outsized growth opportunities for the firm. He stated:
And I think where the most growth will happen, as you've seen, if you think about sort of investments, it's a pyramid. At the very top are the highest-returning strategies. There, we've obviously done a great job in private equity, real estate private equity growth, and life sciences.
As Gray points out, the company expects its core strategies to continue driving growth because they provide investors with the highest return potential. That should enable the company to raise larger funds centered around its bread-and-butter strategies. For example, the company recently closed record private equity secondary funds, raising over $25 billion.
Beyond expanding its core, Gray noted:
But what we're seeing is a lot of growth in strategies where the return profiles are not as high...We think about private credit as a huge area of opportunity because investors, be it insurance companies or individual investors or institutions, are realizing now that they can lend directly to borrowers with help from somebody like Blackstone. That is a very, very big market, and we, today, are still a very small percentage of that.
The company recently started fundraising on its largest real estate debt fund vehicle. Despite the challenging market conditions, it expects to raise about $8 billion, roughly comparable to its predecessor fund.
Gray highlighted insurance companies as another notable growth driver. Blackstone has partnered with four insurance clients and expects this platform to grow. It recently formed a strategic partnership with Resolution Life. Blackstone invested $500 million into Resolution as part of that company's plan to raise $3 billion of new equity capital. Blackstone will initially manage up to $25 billion of Resolution's private assets, with that expected to grow to more than $60 billion over the next six years.
Gray also pointed out that while Blackstone started in the U.S., there "can certainly be a bigger global opportunity." He noted that "Asia's...an area where there's a lot of growth."
"So, when you look across our business," Gray stated, "we see lots of engines of growth."
Plenty of growth ahead
While known more recently for paying a big dividend due partly to its sinking stock price, Blackstone has been a growth stock over the years. Gray commented on the call, "We've grown distributable earnings 20% annually for the past 10 years, more than double the rate of the market." As Gray laid out on the call, there's plenty more growth ahead for the company. That significant growth potential makes Blackstone a very compelling investment opportunity these days.
