The Blackstone Group L.P. (BX): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

Summary:
We are downgrading our long-term recommendation on Blackstone to Neutral owing to constantly rising expenses. Further, the company’s third-quarter 2014 economic net income (ENI) per share missed the Zacks Consensus Estimate. The weak quarterly performance was driven by higher operating expenses. However, consistent improvement in revenues continued to be the company’s strength and salvaged the results to some extent. Going forward, the improving economic conditions are expected to assist the company’s fund-raising ability. Also, the changing investor preference for alternative asset classes and other risk management strategies will further boost top line in the forthcoming quarters. However, we remain apprehensive regarding the adverse effects of ongoing capital market volatility and stringent regulations.

Overview:

Headquartered in New York, The Blackstone Group is an asset manager of alternative investments and a provider of financial advisory services, with total assets under management (AUM) of $284.4 billion as of Sep 30, 2014. The company’s alternative asset management businesses include management of private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation vehicles as well as separately managed accounts.

Blackstone also offers various financial advisory services including mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services. Founded in 1985, the company has offices in 23 cities around the world.

The company operates its businesses through five segments:

The Private Equity segment comprises management of private equity funds, collectively called the Blackstone Capital Partners (BCP) funds, as well as two specialized funds focusing on energy and communications-related investments. Additionally, the segment includes Tactical Opportunities business and Strategic Partners Fund Solutions. As of Sep 30, 2014, the segment’s total AUM was $69.9 billion.

The Real Estate segment primarily comprises management of general real estate and internationally-focused real estate funds that are collectively called the Blackstone Real Estate Partners (BREP) funds. In addition, the segment has real estate debt investment funds known as the Blackstone Real Estate Debt Strategies (BREDS) funds targeting investment opportunities, mainly in the U.S. and Europe. As of Sep 30, 2014, the segment’s total AUM was $80.2 billion.

The Hedge Fund Solutions segment consists of Blackstone Alternative Asset Management (BAAM), an institutional solutions provider utilizing hedge funds across a variety of strategies. The segment’s total AUM was $64.2 billion as of Sep 30, 2014.

The Credit segment includes senior credit-focused funds, distressed debt funds, mezzanine funds and general credit-focused funds concentrated in the leveraged finance marketplace. All these are managed by Blackstone’s subsidiary GSO Capital Partners LP. As of Sep 30, 2014, the segment’s total AUM was $70.2 billion.

The Financial Advisory segment consists of financial advisory services, restructuring and reorganization advisory services, capital market services as well as Park Hill Group, which provides fund placement services for alternative investment funds.

These segments are differentiated by their various sources of income. The Private Equity, Real Estate, Hedge Fund Solutions and Credit segments primarily earn from management fees and investment returns on AUM, while the Financial Advisory segment chiefly earns from fees related to investment banking services as well as advice and fund placement services.

In 2008, Blackstone completed the acquisition of GSO Capital Partners LP for $635 million, including $355 million in cash and $280 million in Blackstone Holdings partnership units.

In 2010, Blackstone purchased 40% equity interest in P tria, a leading Brazilian alternative asset manager and advisory firm. Both companies have agreed to cooperate in building businesses in Brazil and throughout South America.

In 2011, GSO Capital Partners completed the acquisition of management agreements relating to four CLOs vehicles that were previously managed by Allied Irish Banks for a net consideration of $23.4 million.

In 2012, Blackstone completed the acquisition of Vivint Inc, a security provider for more than $2 billion. Further, the company acquired CT Investment Management Co. LLC, an investment management unit of Capital Trust Inc for $20 million.

In 2013, Blackstone completed the acquisition of Strategic Partners Fund Solutions, a dedicated secondary private equity business of Credit Suisse with AUM of $9.4 billion.

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