Bloomberg News

Blackstone Beating BlackRock With Buyout Sales: Riskless Return

March 12, 2014

Blackstone

Russell Investments is drawing takeover interest from suitors including Blackstone Group LP. Photographer: Munshi Ahmed/Bloomberg

Seven years after selling shares to the public at the height of the buyout boom and then watching them slump, Stephen Schwarzman’s Blackstone Group LP (BX:US) is rewarding investors with the top gains among money managers.

Blackstone produced the best risk-adjusted return in the past year among 32 publicly traded global firms, according to the BLOOMBERG RISKLESS RETURN RANKING. The stock, which plunged 88 percent within two years of its initial public offering, has surged 81 percent in the 12 months ended March 11 with about-average volatility, beating private-equity peers such as Apollo Global Management LLC (APO:US) and Carlyle Group LP (CG:US), as well as traditional money managers including BlackRock Inc. (BLK:US)

Blackstone ended a six-year drought when the stock rose above the $31 a share IPO price on Dec. 24, after Chief Executive Officer Schwarzman, 67, seized on rallying stock markets to sell companies. Asset managers that invest a portion of client money in bonds, such as Franklin Resources Inc. (BEN:US), were held back by an industrywide flight out of fixed income after the Federal Reserve signaled plans to pull back its asset purchase program as the economy strengthened.

“For Blackstone -- and for all the alternative-asset managers -- 2013 was stellar,” said Adam Goldman, the founder of Red Rocks Capital LLC, which manages $1.3 billion invested in publicly listed private-equity vehicles. “They’ve had some very, very strong realizations. Investors are also giving them more money for non-private-equity strategies and hence their assets under management are growing, so you have a double effect propelling their stock prices.”

Largest Profit

Blackstone returned $38 billion to fund investors in 2013, the most among rivals such as Apollo, Carlyle and KKR & Co., and is preparing some of its most lucrative holdings for exit. Hilton Worldwide Holdings Inc. (HLT:US), which held its IPO on Dec. 11, has set Blackstone up for its largest-ever profit of more than $10 billion when the firm sells its stake.

The New York-based private-equity firm, which manages $266 billion, has also diversified beyond buyouts into credit, real estate and hedge funds as it seeks to reduce the lumpiness of its earnings. That helped Blackstone produce a risk-adjusted return of 2.7 percent in the past year, with the highest absolute return and volatility of 29.9, compared with 28.2 for the group.

Active Management

Traditional money managers with a large portion of assets in equities also surged in the past 12 months as investors started returning to actively-managed stocks. The Standard & Poor’s 500 Index has advanced 23 percent in the past 12 months, including reinvested dividends.

Waddell & Reed Financial Inc. (WDR:US), a manager of mutual funds that has more than 80 percent of assets in stock strategies, ranked second among money managers with a risk-adjusted return of 2.7 percent. The Overland Park, Kansas-based company produced an absolute return of 72 percent with below-average volatility.

BlackRock, the money manager led by Laurence Fink that got its start as a unit of Blackstone, trailed the private-equity manager after more than tripling since 2008. BlackRock ranked 15th in the Bloomberg ranking as the shares rose 28 percent on an absolute basis with below-average volatility of 25.

Capital Flows

Investors are turning from core bonds and index-tracking products to put money into non-traditional strategies such as credit and high yield (HYG:US). Clients pulled $7.5 billion from BlackRock’s bond ETFs in 2013, compared with $28.8 billion in deposits in 2012. About one-third of BlackRock’s $4 trillion in long-term assets is in fixed income. Investors did deposit $10.4 billion in BlackRock’s active bond funds last year. Including stocks, multi-asset products, alternatives and institutional index funds, BlackRock attracted a net $117 billion into its funds last year.

Bond mutual funds across the industry in the U.S. posted record investor withdrawals of $83.4 billion last year, according to the Investment Company Institute.

“Tapering of the Fed’s bond-buying program has made it really difficult to make money in fixed income,” said David Fann, the CEO of TorreyCove Capital Partners LLC, which advises institutional investors. “So I’m not surprised to see capital flowing out of that asset class.”

Carlyle, the Washington-based private-equity firm led by William Conway, Daniel D’Aniello and David Rubenstein, had the lowest risk-adjusted return among alternative-asset managers, with 0.4 percent, according to Bloomberg’s ranking. The shares returned 11 percent on a cumulative basis in the past year, with volatility of 32, according to data compiled by Bloomberg.

Predictable Fees

The firm’s fee-related earnings fell 11 percent in 2013 from the previous year as Blackstone’s rose 6 percent and KKR’s gained 29 percent. Part of the decline was due to higher fundraising costs, Adena Friedman, Carlyle’s chief financial officer, said Feb. 19.

According to Matt Kelley, an analyst at Morgan Stanley in New York, Carlyle gets a lower portion of its earnings from predictable management fees than its peers, which can keep stock analysts and investors on the “sidelines.”

Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price variation, providing a measure of income per unit of risk. The returns aren’t annualized. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Blackstone shares are now 11 percent above the IPO price, sending Schwarzman’s net worth up $784 million so far this year to $11.3 billion, according to the Bloomberg Billionaires Index.

Birthday Party

The industry-beating performance marks a turnaround for the private-equity firm, which went public in June 2007, four months after Schwarzman held a 60th-birthday party at the Park Avenue Armory in Manhattan that in conjunction with the IPO became symbols of the excesses of the last credit boom. As U.S. housing crashed in 2008 and mortgage losses fueled a global credit freeze, Blackstone’s stock plunged. Schwarzman publicly complained that analysts and investors weren’t valuing the stock correctly and in December called its return to $31 a “huge relief.”

Blackstone sold BlackRock, which was once its mortgage-securities unit, to PNC Bank Corp. in 1994. Schwarzman, Blackstone’s co-founder, had disagreed with the group’s leader, Fink, over methods of compensation.

“That was certainly a heroic mistake,” Schwarzman said last year.

Christine Anderson, a Blackstone spokeswoman; Randall Whitestone, a spokesman for Carlyle; and BlackRock spokesman Brian Beades declined to comment.

’Early Innings’

Private-equity firms pool money from investors to buy companies, manage them and then sell them for a profit in 10-year cycles. They typically keep 20 percent of profits from investments as a so-called carried interest on top of an annual management fee of 1 percent to 2 percent of committed funds.

Buyout firms’ earnings don’t follow a linear trajectory because they’re driven by the timing of exits as well as “mark-to-market” valuations of fund holdings, which are vulnerable to market swings. Managers of traditional stocks and bonds, which manage investment offerings such as mutual funds and exchange-traded funds, get most of their income from management fees, making earnings more stable.

“There’s still a lot more learning and understanding to be done by investors of how a private-equity firm operates,” Red Rocks’ Goldman said of investing in managers like Blackstone. “We’re making progress, but we’re probably still in the early innings.”

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net Pierre Paulden, Sree Vidya Bhaktavatsalam


Race, Class, and the Future of Ferguson
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Companies Mentioned

  • BX
    (Blackstone Group LP/The)
    • $32.42 USD
    • -0.33
    • -1.02%
  • APO
    (Apollo Global Management LLC)
    • $23.78 USD
    • -0.20
    • -0.84%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus