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    Blackstone Inc (BX)

    Board Change

    Blackstone Inc. is the world's largest alternative asset manager, managing over $1 trillion in total assets as of December 31, 2023. The company operates through four main business segments: Real Estate, Private Equity, Credit & Insurance, and Hedge Fund Solutions, generating revenue primarily through management fees, performance allocations, and incentive fees, which vary with market conditions and business cycles . Blackstone offers a diverse range of investment products, including traditional drawdown funds, perpetual capital vehicles, and customized fund solutions, and has been expanding its private wealth strategy to cater to high-net-worth and mass affluent individual investors .

    1. Real Estate - Leads globally in real estate investing, focusing on high-quality assets with growth potential, such as logistics, data centers, rental housing, and hospitality .
    2. Private Equity - Targets a broad range of investments, including corporate private equity, energy transition, and growth equity .
    3. Credit & Insurance - Includes strategies like direct lending and opportunistic credit .
    4. Hedge Fund Solutions - Manages a variety of hedge fund strategies and includes the GP Stakes business; will be renamed Multi-Asset Investing in 2024 .
    Initial Price$124.39July 1, 2024
    Final Price$151.85October 1, 2024
    Price Change$27.46
    % Change+22.08%

    What went well

    • Blackstone anticipates a significant increase in IPO activity in 2025, which is expected to boost their business through higher realizations and capital market activity.
    • There's a substantial growth opportunity in the $25 trillion asset-based lending market, where private players currently hold only 1-2% penetration; Blackstone expects their numbers in this market to grow considerably.
    • Blackstone's insurance business has expanded to $221 billion, up 24% year-over-year, with strong momentum in strategic partnerships and separate accounts, indicating continued expansion.

    What went wrong

    • Growth in certain key metrics fell short of expectations, with back book pressures running at about 10% of fee-paying assets under management (FPAM), potentially impacting future fee-related earnings (FRE) growth outlook.
    • Uncertainties in forming new strategic partnerships in the insurance sector, as strategic relationships "take time" and it's "hard to predict when and how those will happen," which may slow down growth in this area.
    • Concerns about Blackstone's competitive positioning in asset-based lending, with questions about whether the firm has done enough to get its fair share in terms of bank partnerships and third-party origination, potentially limiting its ability to capture opportunities in the asset-backed world.

    Q&A Summary

    1. M&A and IPO Outlook
      Q: Will M&A and IPO activity increase, or will companies stay private longer?
      A: Jonathan Gray believes the environment is improving for both M&A and IPO activity as debt costs come down and equity markets strengthen. He expects a much better IPO market in 2025, which would be positive for realizations and DPI. Gray notes that private companies are being drawn into the market as public valuations rise.

    2. Impact of Lower Rates on Credit Business
      Q: How will lower base rates and tighter spreads affect the credit business?
      A: Jonathan Gray states that even as base rates and spreads decline, Blackstone can still produce a durable premium over liquid fixed income. Products like BCRED have delivered 700 basis points over base rates since inception. Relative returns remain attractive, supporting continued migration towards private credit.

    3. Fee-Related Earnings (FRE) Growth Outlook
      Q: What is the outlook for FRE growth amid back book headwinds?
      A: Michael Chae expresses optimism for 2025 FRE growth, citing multiple building blocks such as base management fees, activation of flagship vehicles, expansion of perpetual strategies, and momentum in credit and insurance. He acknowledges challenges but emphasizes a strong path forward without relying on quarter-to-quarter net flow algorithms.

    4. Secondaries Performance Lag
      Q: Why does secondaries performance continue to lag below hurdle rates?
      A: Jonathan Gray maintains confidence in the secondaries business, highlighting that since inception, flagship private equity secondaries funds have achieved high-teens net returns. Recent underperformance is attributed to lower immediate gains from buying new deals at discounts and the lagging performance of mature underlying funds. Michael Chae adds that investment performance has been outstanding overall.

    5. Investing Pipeline and Sector Favorability
      Q: Is the November election delaying investments, and which sectors are favorable?
      A: Jonathan Gray hasn't observed a slowdown due to the election and notes that both real estate and private equity are expected to see increased activity. Real estate may experience a larger percentage pickup due to rebounding from a low base, with conditions like falling interest rates and improving investor sentiment contributing to the positive outlook.

    6. Real Estate Investment Outlook
      Q: Will Blackstone be a net buyer or seller in real estate, and which assets are favored?
      A: Stephen Schwarzman indicates that Blackstone has been a net buyer and expects to continue investing, especially as debt becomes more available at lower costs. The firm favors sectors like logistics, rental housing, data centers, and sees opportunities in select office and retail spaces. Sentiment is improving, and they anticipate increased realizations in 2025.

    7. Asset-Backed Opportunity and Bank Partnerships
      Q: How big is the asset-backed opportunity, and has Blackstone secured enough partnerships?
      A: Jonathan Gray explains that the asset-backed market is approximately $25 trillion, much larger than the $5 trillion leveraged finance market, with private players holding only 1-2% penetration. He is optimistic about significant growth potential. While Blackstone prefers a do-it-yourself approach, they are open to partnerships in specific areas and continue to build origination capabilities.

    8. AI and Data Center Investments
      Q: How will deployment opportunities in AI and data centers affect fundraising?
      A: Jonathan Gray states that having large-scale pools of capital is a competitive advantage in investing in data centers, which have been a lead driver in their infrastructure business, delivering 16% net returns since inception. While it's too early to say if deployment will accelerate fundraising, he feels they have momentum in the U.S., Europe, and Asia, and expects faster deployment and higher returns.

    9. Operating Expenses and Margin Outlook
      Q: What drove the increase in operating expenses, and how will margins look next year?
      A: Michael Chae attributes the operating expense growth to third-party servicer fees from the Signature Debt Portfolio acquisition, placement fees primarily related to BXPE, and consulting spend. Adjusting for these items, underlying growth is in the low double digits. He expects a lower rate of growth in Q4 and feels good about margin stability and potential expansion in 2025.

    10. Funds Coming Off Fee Holiday and Fundraising Impact
      Q: How much AUM came off fee holiday, and what does this mean for future fundraising?
      A: Michael Chae notes that new private equity and infrastructure funds came off fee holiday in Q3, with foregone fees around $40 million. Jonathan Gray mentions that institutional investors are feeling better, and as DPI picks up, they expect a better fundraising environment in 2025, with funds like private equity Asia, Life Sciences, and opportunistic credit in the pipeline.

    11. Wealth Management and Competition
      Q: How is rising competition impacting Blackstone's wealth management platform?
      A: Stephen Schwarzman emphasizes their first-mover advantage with $250 billion in AUM and strong relationships with financial advisors. He believes the firm's scale and performance create goodwill, and as base rates come down, the attractiveness of their products increases. Jonathan Gray adds that fewer groups can compete in this space due to shelf space limitations, and their brand and reach are significant advantages.

    12. Insurance Platform Growth
      Q: Can you comment on growth opportunities in the insurance platform?
      A: Jonathan Gray reports that Blackstone's overall insurance business grew to $221 billion, up 24% year-over-year. Dialogues with insurance companies are exceptionally strong, both in strategic partnerships and separately managed accounts (SMAs). He expresses high optimism for continued growth in this area, emphasizing the value of 185 basis points of excess return for A-rated paper to insurance clients.

    NamePositionStart DateShort Bio
    Stephen A. SchwarzmanCo-Founder, Chairman, and Chief Executive Officer1985Stephen A. Schwarzman is the Co-Founder, Chairman, and Chief Executive Officer of Blackstone Inc. He has been involved in all phases of the firm's development since its founding in 1985. He is also an active philanthropist .
    Jonathan D. GrayPresident, Chief Operating Officer, and Director1992Jonathan D. Gray is the President and Chief Operating Officer of Blackstone Inc. and a member of the board of directors. He joined Blackstone in 1992 and has served as President and COO since March 2018 .
    Michael S. ChaeChief Financial OfficerAugust 2015Michael S. Chae is the Chief Financial Officer of Blackstone Inc. and a member of the firm's Management Committee. He has served as CFO since August 2015 and joined Blackstone in 1997 .
    John G. FinleyChief Legal OfficerSeptember 2010John G. Finley is the Chief Legal Officer of Blackstone Inc. and a member of the firm's Management Committee. He joined Blackstone in September 2010 .
    Vikrant SawhneyChief Administrative Officer and Global Head of Institutional Client SolutionsSeptember 2019Vikrant Sawhney is Blackstone's Chief Administrative Officer and Global Head of Institutional Client Solutions. He has served in this role since September 2019 and joined Blackstone in 2007 .
    1. Given the substantial capital required for your data center investments and the rapid growth in this area, how confident are you that your fundraising efforts can keep pace with deployment opportunities, and what strategies are you implementing to ensure sufficient capital availability in light of potential fundraising challenges?

    2. Operating expenses increased this quarter due to placement fees, third-party servicer fees, and consulting spend ; how do you anticipate these expenses impacting margins and FRE growth in the near term, and what measures are you taking to manage operating leverage next year?

    3. With the back book headwinds impacting FRE growth and metrics falling short of expectations, particularly with a 10% run rate of back book pressures , how do you plan to overcome these challenges to ensure sustainable organic net flow rates and FRE growth moving forward?

    4. Given the renewed interest in commercial real estate and the positive trends in BREIT flows , how sustainable do you believe this recovery is, and what risks do you foresee that could potentially reverse these positive net flow trends?

    5. As the asset-based lending market represents a $25 trillion opportunity, and private players currently hold only 1–2% , do you believe you have done enough to secure your fair share in this space, and what further steps are you taking to enhance your position, particularly regarding bank partnerships and origination capabilities?

    Program DetailsProgram 1
    Approval DateJuly 16, 2024
    End Date/DurationNo specified expiration date
    Total additional amount$2.0 billion
    Remaining authorization amount$1.9 billion (as of September 30, 2024)
    DetailsThe program may be changed, suspended, or discontinued at any time

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2025
    • Guidance:
      1. Fee-Related Earnings (FRE): Anticipates a material step-up in Q4 2024 due to full management fees for multiple funds exiting fee holidays.
      2. Management Fees: Continued growth expected due to flagship vehicles and expansion of perpetual strategies.
      3. Fee-Related Performance Revenues: Expansion expected, particularly from direct lending BDCs and BREIT.
      4. Operating Expenses: Lower growth rate expected in Q4 2024 compared to Q3 2024.
      5. Fundraising Environment: Better environment expected in 2025.
      6. Real Estate Activity: Increased activity anticipated in logistics, rental housing, and data centers.
      7. Private Wealth Channel: Growth expected as base rates decline and investor enthusiasm increases .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q4 2024 and FY 2025
    • Guidance:
      1. Net Realizations: Anticipates acceleration over time as markets heal.
      2. Fee-Related Earnings (FRE): Material step-up expected in Q4 2024.
      3. 2025 Outlook: Full-year benefit of flagship vehicles and expansion of perpetual strategies.
      4. Real Estate and Infrastructure: Optimism about increasing values and AI infrastructure investments.
      5. Private Wealth Channel: Launch of new products and expansion in Asia .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Fee-Related Earnings (FRE) and Margins: Stability expected with potential for improvement.
      2. Investment Performance and Realizations: Muted net realizations with strong underlying FRE.
      3. Fundraising and Deployment: Robust pipeline with $25 billion invested in Q1.
      4. Private Wealth Channel: Continued growth expected.
      5. Infrastructure and Credit Business: Growth expected with inflows from insurance clients.
      6. Market Environment and Economic Outlook: Positioned to take advantage of opportunities despite uncertainties .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Management Fees and Fee-Earning AUM: Increase expected as drawdown funds activate.
      2. Fund Activation: Several flagship funds to start earning fees.
      3. Private Credit Strategy: Targeting $10 billion for the fifth strategy.
      4. Perpetual Capital Platform: Expansion with significant growth in fee-earning AUM.
      5. Insurance Channel: Substantial inflows expected.
      6. Real Estate: Recovery expected with $65 billion of dry powder.
      7. Investment Activity: Focus on digital infrastructure, enterprise software, and energy transition.
      8. Fee-Related Earnings (FRE) Margin: Aim to maintain stability.
      9. Realizations: Anticipates acceleration in the future.
      10. Insurance Inflows: Baseline inflows expected from major clients .

    Competitors mentioned in the company's latest 10K filing.

    • Private funds, specialized investment funds, funds structured for individual investors, hedge funds, funds of hedge funds, and other sponsors managing pools of capital - Compete with Blackstone in the asset management business .
    • Corporate buyers, traditional asset managers, commercial banks, investment banks, and other financial institutions (including sovereign wealth funds) - Compete with Blackstone for investment opportunities and capital .
    • Traditional asset managers - Some have developed their own private equity and retail platforms, offering alternative strategies to hedge fund investments .
    • Institutional investors - Some prefer to in-source their own investment professionals and make direct investments without private equity advisers like Blackstone .
    • Sponsors managing other funds, investment vehicles, and other pools of capital, other financial institutions and institutional investors (including sovereign wealth and pension funds), corporate buyers - Compete with Blackstone for attractive investment opportunities .

    Recent developments and announcements about BX.

    Corporate Leadership

      Board Change

      ·
      Nov 13, 2024, 12:00 AM

      Kelly A. Ayotte, a member of the board of directors of Blackstone Inc., has notified the company of her intention to resign from the Board effective November 14, 2024 following her election as governor of New Hampshire. The size of the Board will be reduced from nine members to eight members .

      Leadership Change

      ·
      Nov 13, 2024, 12:00 AM

      Kelly A. Ayotte is leaving the board of directors of Blackstone Inc. Reason: She was elected as governor of New Hampshire. Effective Date: November 14, 2024. Impact: The size of the Board will be reduced from nine members to eight members .