Why Is Blackstone Cheap?

Chidem Kurdas

Blackstone Group is still trading well below its price in 2007, when it went public. During that time the firm increased its assets by 101% to $146.5 billion. The net asset value is up, the stock is down. Go figure.

Of course, a lot happened in the past five years and Blackstone’s earnings remain at less than the 2007 peak, showing the impact of adverse economic and financial events. The stock has recovered some but is down by around 50% from 2007.

There is something else going on. In a presentation, chief financial officer Laurence Tosi pointed out that Blackstone is now trading at a bigger discount to traditional asset managers than ever before. Blackstone’s price-to-earnings is 9x; traditional managers’ average P/E  ratio is 14x. “So, why the steep discount?” Mr. Tosi asked.

In fact this is not specific to Blackstone. Traded alternative investment managers tend to have lower P/E, whether on Swiss, London or NY exchanges. Also, their stock price tends to be less than their NAV. The commonly offered explanation is that alternative investment managers are harder to understand, less known to the public than traditional managers – who’ve been around longer – and covered by fewer analysts.

On top of those handicaps, there may be a perception that alternative managers have a riskier business, even though in the crisis they did not do as badly as traditional managers. Another issue is the flightiness of their capital base. Investors did rush to the exits in 2008-2009. All these concerns make for a small market.

Mr. Tosi emphasized Blackstone’s diversified revenue sources and growing global footprint—the latest private equity fund was raised 50% from outside the US. While the real estate and private equity businesses get attention, the credit funds and hedge funds account for more of the capital.

He argued that earnings gave grown persistently since the crisis and the outlook is favorable. There is $33 billion in committed capital to be deployed and he cited opportunities in each segment—for instance in hedge funds, less capital and more talent fleeing investment banks, bringing new ideas.

From Mr. Tosi’s description, the stock sounds like a great value. But those discounts can be pretty pesky and persist against all reason.

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