The private equity and alternative asset firm Blackstone (BX) may soon find its way into the S&P 500. Let's see what the chances are for its acceptance in the club, and what it could mean for investors.
Preventing Blackstone from entering the S&P had been its stock structure: Out of 1.2 billion shares outstanding, 480 million are made up of super-voting partner units. But the S&P just eased eligibility requirements for dual-class structured stocks last week, opening the door for BX's inclusion into the S&P 500 in the near future.
Just as this rule change occurred, Blackstone also reported a solid quarter, making the story even more intriguing. Asset growth was seen in the four main strategy segments: private equity, real estate, hedge fund solutions, and credit and insurance. Assets under management increased to $991 billion, up 8% year-over-year and doubling over the last five years, with the vast majority of capital under long-term contracts and perpetual strategies. Management fees increased 13% to $1.6 billion. The company raised $217 billion in the last 12 months, including $40 billion in the first quarter.
Blackstone has developed an enviable track record of managing capital since 1985, and continues to be a prolific asset gatherer. Management is highly confident in BX's earnings power in fee-related earnings (FRE) with multiple engines of growth in various strategies.
The stumble in the last few months came from its Blackstone Real Estate Income Trust, which manages $125 billion in real estate assets, and saw high redemption requests. BX has seen stabilization in repurchase trends, down 16% at the end of the first quarter, compared to the January peak. Nonetheless, BREIT continues to generate growth in cash flows, up an estimated 9% year over year.
Commercial office buildings are the most significant macro cause for concern in real estate. Blackstone's management allayed fears about its real estate portfolio, which has minimal office exposure of less than 2%. BX's real estate holdings are 83% in high-conviction sectors, including logistics, rental housing, hotels, data centers, and life sciences.
Credit Suisse has an outlier bearish outlook on BX with a $70.50 sum-of-the-parts target, citing the high degree of uncertainty in the macro environment, with the potential for weaker asset-gathering, contracting margins, and further weak markets impeding realizations. Most other firms are far more optimistic, with an average Street price target of $101.
Blackstone distributes all its earnings to shareholders through dividends and buybacks. The dividend yield is 3.7%, and the buybacks seem to merely offset dilution from equity grants. BX trades at around 15-times 2024 distributable earnings, a reasonable valuation for consistency and steady growth.
With the recent changes, the S&P will again include companies with multiple share classes. Blackstone should be next up for inclusion as the largest eligible company not in the index at over $100 billion in market cap. A likely time to include BX is during S&P's major rebalance in June. Several regional banks with shrunken market caps at the bottom of the S&P 500 will likely get booted, including First Republic (FRC) and Zions Bank (ZION) , to make room for additions. BX would have a disproportionately high share add, thanks to its size and since it's not graduating from a smaller S&P index. Therefore, the S&P may allow for a couple of weeks of advanced notice.
Blackstone has many moving parts, which could add to some investor uncertainty. With 80% of its assets under management deployed throughout the global economy, BX could face macro headwinds in a recession. But even in fraught times, Blackstone has almost $200 billion in dry powder to put capital at risk at better prices, especially in real estate credit with banks pulling back. Buying BX means betting on continued stellar management, yet it's a bet worth making. Whether for a trade or a long-term investment, BX ought to be at the top of financial stocks to buy over the next few weeks, into any material weakness, ahead of a likely S&P addition in June.
