Blackstone Group LP (BX:US), the world’s biggest manager of alternatives to stocks and bonds, closed above $31 for the first time since 2007, the year it went public at that price before the housing crisis froze financial markets.
Blackstone climbed 0.5 percent to $31.01 in New York trading, bringing gains this year to 99 percent. The stock hadn’t closed as high since July 9, 2007, less than three weeks after the IPO, and fell as low as $3.87 in February 2009.
The rally ends a six-and-a-half-year drought for investors who bought the stock at the IPO, expecting to get a share in the lucrative fees private-equity firms earn from managing money for institutions and the wealthiest individuals. Instead, credit markets froze, deals came to a standstill and fees dried up. Co-founder Stephen Schwarzman, who had personally lost more than $6 billion on paper when the stock reached its low, responded with an expansion beyond leveraged buyouts that almost tripled assets to more than $248 billion from $88 billion at the offering.
“When our stock returns to issue price, it will be a huge relief for me,” Schwarzman, who founded the private-equity firm with partner Peter G. Peterson in 1985, said in an interview on Dec. 17. “Our firm will be looked back on as a huge investment opportunity because the stock has traded at such a discount.”
Blackstone became the second manager of private-equity funds to go public when it sold a 12.3 percent stake on June 21, 2007, raising $4.13 billion. Fortress Investment Group LLC (FIG:US), a New York-based manager of hedge funds and private-equity funds, held its IPO four months earlier, selling shares for $18.50 apiece. The stock closed at $8.52 in New York, 54 percent below the offer price.
In recent years, competitors KKR & Co. (KKR:US), Apollo Global Management LLC (APO:US), Carlyle Group LP (CG:US) and Oaktree Capital Group LLC (OAK:US) have followed the two firms in selling their shares to the public. KKR and Apollo are based in New York, while Carlyle is headquartered in Washington and Oaktree is based in Los Angeles.
Blackstone led the industry in diversifying its lines of business, seeking to grow fee-paying assets and tap more consistent streams of revenue. Leveraged buyouts, the method of corporate private-equity investing, produce most of their earnings in market cycles that are difficult to predict, making the stocks volatile and dividend payouts hard to time.
Blackstone has paid stockholders $5.32 a share in total dividends since the IPO, spokesman Peter Rose said. Schwarzman, who has a net worth of $10.3 billion, according to the Bloomberg Billionaires Index, hasn’t sold any of his shares.
“The industry has changed since they went public,” said Marc Irizarry, a managing director at Goldman Sachs Group Inc. who researches Blackstone. “Alternative-asset managers like Blackstone are acting as the new intermediaries in areas where banks used to be the main operators, and that’s going to continue.”
In early 2008, Blackstone acquired GSO Capital Partners LP, a manager of leveraged loans and distressed debt run by former Drexel Burnham Lambert Inc. executive Bennett Goodman. Later that year, as the U.S. financial crisis sent shock waves through markets, GSO loaned to and invested in burdened companies around the world. Its $10 billion in assets at the time have grown to more than $63 billion and it’s now the biggest investor in high-yield corporate loans in Europe, where banks burdened by heightened capital standards have left a lending void.
“The function of these firms has evolved, and the function of Blackstone has evolved,” said Irizarry. “One place you can see that is the growth of GSO. They’re moving into alternative credit areas that were traditionally serviced by banks.”
Blackstone’s real estate business has ramped up investments since 2008, when it raised an $11 billion fund to invest in property around the world. Led by Jonathan Gray, who joined the firm after graduating college in 1992, the business has produced a realized net internal rate of return of 27 percent annually, according to the company’s earnings as of Sept. 30. Last year Blackstone gathered $13.3 billion for the largest opportunistic property fund ever raised, and it’s now seeking money to invest in European and Asian real estate.
Blackstone on Dec. 11 took public Hilton Worldwide (HLT:US) Inc., the world’s biggest hotel operator, in a shares offering that raised $2.35 billion. Blackstone’s stake in McLean, Virginia-based Hilton is valued at more than 2.5 times the $6.5 billion in equity that the firm contributed following the October 2007 leveraged buyout.
“The real estate business, in a time when a lot of competitors were struggling from 2007 onward, stood out from the crowd,” Irizarry said. “The harvesting cycle is not done for either real estate or private equity. If the underlying economy continues to grow you could see even more harvesting, which should be good for Blackstone’s shares.”
Blackstone’s competitors are also taking advantage of rising stock markets to sell holdings and return money to shareholders, which in turn has boosted their own shares. Apollo, run by former Drexel executive Leon Black, has risen 76 percent this year; shares of KKR, led by Henry Kravis and George Roberts, have increased 60 percent; and Carlyle, founded by Bill Conway, Dan D’Aniello and David Rubenstein, has gained 39 percent.
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