For several years now, I’ve been bullish on Blackstone Inc. (BX).
The stock is one of my favorite long-term investments and has historically been a great play for income investors.
That’s because the company has a very lucrative business model that allows it to collect profits in good times and bad. Blackstone also has a blue-chip client roster full of deep-pocketed investors who invest billions with the private equity company.
And finally, Blackstone has a history of passing its profits on to investment through variable dividends that often represent a very attractive yield for investors.
But today, shares of Blackstone are well off their 2021 peak, and are now trading very close to multi-year lows.
Is this pullback a buying opportunity? Or should investors stay away?
Let’s take a closer look at what’s driving the stock lower.
Blackstone Shuts the Gates
As a private equity firm, Blackstone manages money for big institutions and wealthy individuals. Many of Blackstone’s clients include pension funds, endowments, retirement plans and family offices.
Blackstone typically creates private funds that are focused on specific areas of the market — such as oil and gas funds, real estate funds, or funds that hold positions in private companies that do not trade on public stock exchanges.
When investors buy into these funds, they must agree to the terms of the specific fund. And many of these funds have “gates” that limit how much money can be pulled out of the funds at any one point in time.
This provision is meant to protect all investors in the fund. Because if the gates weren’t in place, a number of withdrawal requests could force Blackstone to sell investments that the fund holds — and many of the investments may not be liquid or able to be sold in a short period of time.
Last week, Blackstone announced it would raise the gates (or limit withdrawals) from the company’s “Blackstone Real Estate Income Trust” — known as BREIT.
While the value of BREIT has actually gone UP this year, many of the fund’s investors have asked to exit their positions. In some cases, the investors were getting margin calls from big losses in other areas of their investments. they wanted to sell BREIT to raise cash and offset these losses.
Since the real estate positions in this fund are not easily (or quickly) sold, it made sense for Blackstone to limit withdrawals. From this point, Blackstone will likely seek other investors who are willing to take on these positions that are being sold — or possibly look for buyers of the real estate owned by BREIT.
A Normal Part of the Private Equity Business
While it may sound alarming that Blackstone is denying investor withdrawal requests, this is actually a very normal part of the private equity business.
These funds are only able to invest in illiquid assets because they can be assured that the majority of investors will stay with the fund long-term. If Blackstone did not have these gates written into the investment documents, the funds would be vulnerable any time investors panicked and wanted to exit.
So while it’s not necessarily a “good look” for Blackstone to shut these gates on investors, it doesn’t mean the company is insolvent or that there’s a major issue going on behind the scenes.
It simply means that Blackstone is protecting the other investors in BRIET and managing the business so the fund won’t have to sell its real estate holdings under pressure.
Meanwhile, the overall company continues to generate reliable profits. And that’s great news if you own shares of BX.
The company’s overall business remains robust, thanks to Blackstone’s three separate profit centers.
Blackstone’s Three Sources of Profit
Ever since Blackstone became a publicly traded stock, I’ve had a deep appreciation for the company’s business model.
That model generates profits from three lucrative sources.
First, Blackstone charges management fees for the assets that customers invest in Blackstone’s funds. These fees are charged whether Blackstone is profitable or not. So management fees have become a reliable source of profits in good times and bad.
At the end of the third quarter, Blackstone reported fee earning Assets Under Management (or AUM) of $705.9 billion. That figure is up 34% over last year. So it’s encouraging to see this source of income continue to grow.
Second, Blackstone charges “incentive allocations” for investment profits. In other words, Blackstone keeps a percentage of the profits it generates for clients.
This source of profit is a bit less reliable. Because not every investment will be successful. And as markets ebb and flow, so do the investment profits in the funds Blackstone manages.
But when Blackstone’s investments pan out, the company’s portion of investment gains can be incredibly lucrative.
Third, Blackstone invests its own funds alongside customers. So even though Blackstone is managing investments for customers, the company has its own skin in the game for many of its funds.
If you’re a Blackstone shareholder, you benefit from all three of these profit sources.
A History of Lucrative Dividends
As you know, I love stocks that pay lucrative dividends.
Blackstone has a “variable dividend policy”. This means Blackstone adjusts its quarterly dividend based on the company’s profitability.
Over the last four quarters, BX has paid the following dividends:
- Feb 4: $1.45 per share
- Apr 29: $1.32 per share
- Jul 29: $1.27 per share
- Oct 28: $0.90 per share
All together, Blackstone has distributed $4.94 per share to investors. Compared to the current stock price near $82, that represents a 6% dividend yield. Impressive!
Now thanks to the bear market, it is likely that Blackstone’s dividend payments will pull back a bit in 2023. But given the company’s huge asset base — and the fact that Blackstone is collecting more capital from its well-heeled clients — I wouldn’t be surprised to see its dividends hold up nicely.
So while other investors fret about the company’s gates on its BREIT real estate fund, I would suggest using this pullback as an opportunity to buy shares of BX. And if you already own the stock, this might be a good time to add to your position!
I’ll keep an eye on this private equity stock and let you know if my opinion changes.
In the meantime, feel free to download a recent copy of my watch list to see what’s on my radar right now.
Here’s to growing and protecting your wealth!
Zach
