Morningstar - Q3 2022 - 55

Downturn Creates a Rare Deal
Blackstone is the best-positioned U.S.-based
alternative-asset manager.
Greggory Warren
BEST IDEAS: EQUITY
This article is adapted from a Morningstar equity research report dated
July 6, 2022.
With the U.S. equity markets posting their worst first half of the year in the past
five decades, there are bargains among the U.S.-based alternative-asset
managers we cover. Blackstone's BX decline has left the company's shares
in an attractive trading position for longer-term investors.
As of July 6, we have lowered our fair value estimate for Blackstone to $125
per share from $130, mostly because of continuing equity and credit
market losses and potentially weaker capital deployment in the face of
near-term volatility, as opposed to anything fundamental. We still consider
Blackstone to be our top pick among the U.S.-based alternative-asset
managers. The company's shares are trading at a 25% discount to our revised
fair value estimate, which is in line with the rest of the alternative-asset
managers we cover, but Blackstone traditionally trades at a premium to peers.
Blackstone has built a solid position in the alternative-asset-management
industry, using its reputation, broad product portfolio, investment performance
track record, and cadre of dedicated professionals to not only raise massive
amounts of capital but maintain its reputation as a " go-to firm " for institutional
and high-net-worth investors looking for exposure to alternative assets.
Unlike the more traditional asset managers, which have had to rely on investor
inaction (driven by either good fund performance or investor inertia/
uncertainty) to keep annual redemption rates low, the products offered by
alternative-asset managers can have lockup periods that prevent investors from
redeeming part or all of their investment for a prolonged amount of time.
Blackstone is one of the world's largest alternative-asset managers, with
$915.5 billion in total assets under management, including $678.0
billion in fee-earning assets under management, at the end of March 2022.
The company's portfolio is broadly diversified across four business segments-
private equity (24% of fee-earning AUM and 29% of base management
fees), real estate (35% and 40%), credit and insurance (30% and 20%),
and hedge fund solutions (11% and 11%)-and it primarily serves institutional
clients. With customer demand for alternatives increasing, and investors
in alternative assets attempting to limit the number of providers they
use, large-scale players like Blackstone are well positioned to gather and
retain assets for their funds.
Blackstone BX
Stats 06/30/2022
Morningstar Rating
QQQQ
Price
$91.23
Economic Moat
Narrow
Price/Fair Value 06/30/2022
Fair Value Estimate Per Share
130.00
91.23
Month-End Closing Price
06/2019
06/2020
06/2021
$150
60
90
120
30
Sector
y Financial Services
Fair Value Estimate
$130.00
Capital Allocation
Standard
Industry
Asset Management
Uncertainty
High
Market Cap
$66.42 Billion
That said, investors in Blackstone are counting on the company's outstanding
investment record and fundraising capabilities to continue. While
we have confidence in the firm's ability to earn excess returns over the next
10 years, we believe it will become increasingly difficult longer term, as
increased competition from peers (including more-traditional asset managers
like BlackRock BLK), continued pressure on fees, and a general maturation
of the segment (from a solid period of above-average growth due to shifting
investor demand for alternatives) weigh on results. As such, we believe
Blackstone has only a narrow Morningstar Economic Moat Rating even though
it exhibits characteristics of a wide-moat firm. K
Greggory Warren is a sector strategist at Morningstar Research Services LLC.
morningstar.com/products/magazine
55
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Morningstar - Q3 2022

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