Blackstone Hedge Fund Purchase Expands Horizons
Last week, The Blackstone Group (BX) announced a minority stake in hedge fund manager Marathon Asset Management. This transaction is just the latest in a series of Blackstone hedge fund purchases over the past few quarters.
In today’s market, hedge funds have fallen out of favor thanks to disappointing performance. So it is not surprising that shares of BX are trading lower following the announcement.
But despite the negative price action, Blackstone should benefit mightily from these investments. With a shrewd and experienced investment team, I expect Blackstone’s long-term profits to soar. Shares should rally once investors realize the wisdom of these and other BX investments.
Let’s look at two primary ways the Blackstone hedge fund acquisitions could pay off
Blackstone Hedge Fund Relationships Widen Its Customer Base
The hedge funds Blackstone is investing in manage billions of dollars for institutional clients. These clients make perfect prospect for investments offered by Blackstone.
It makes sense for Blackstone to develop relationships with these funds. These relationships offer tremendous opportunities to cross-pollinate customer lists.
Blackstone has an incentive to steer its clients toward the hedge fund managers. As an investor in these hedge funds, Blackstone can share in potential profits.
Blackstone can also use customer lists from the hedge fund managers. This should allow Blackstone to sell its own products to hedge fund clients.
The end result will likely be more business both for Blackstone and for the hedge fund companies.
Blackstone Hedge Fund Research Sheds Light on Key Industries
The hedge funds acquired each have unique areas of expertise. As a “go anywhere” private equity company, Blackstone can benefit from this research.
For example, Marathon Asset Management focuses on distressed debt. This specialty includes discount bond investing. I’m a big fan of this income approach.
Distressed debt investing requires experience and tedious research. That’s why institutional investors are willing to pay Marathon hefty fees. In turbulent market periods, these investments can generate very lucrative returns.
Blackstone is likely to benefit from Marathon’s expertise and experience. As a minority owner, it’s possible that the two companies could join forces on specific deals. I wouldn’t be surprised to see Blackstone and Marathon announce joint investments in the future.
Out of Favor, But Still An Excellent Company
As you can see in the chart below, 2016 has not been kind to Blackstone. Shares are off roughly 20% from where they were trading in April, and down nearly 50% from the 2015 high.
Despite the weak stock price, I still believe Blackstone is an excellent investment.
Blackstone continues to raise capital even in a tough market. This capital will help the company generate fees in the future. And Blackstone can find discount investments for this capital. The minority investment in Marathon is a good example.
By purchasing out of favor assets at discount prices, BX is making excellent investments. When the market turns and distressed debt rises, profits could soar. Similarly, when hedge funds come back into favor, these investments will pay off.
I particularly like BX because of the dividend yield. Over the past year, the company has paid dividends of $2.12 per share. That’s good for an 8.9% yield compared to today’s stock price.
Of course Blackstone’s dividend varies depending on profits. And the most recent dividend was the lowest since October of 2013.
But Blackstone’s growing assets under management should solve that problem. Over the next year, fees will likely kick in. And as profits expand, the dividend will rebound. That’s why buying shares now — at a discount price — could lead to large returns down the road.