BlackRock vs. Blackstone: Who Did Better?

Chidem Kurdas

When Blackstone chief Stephen Schwarzman compared his firm’s first quarter performance to that of asset management behemoth BlackRock, he praised his competitor.

“BlackRock came out with its results and they are really good,” he said, during a conference call.

But there was no mistaking his message. BlackRock’s earnings rose 20% while his own Blackstone’s were up 30%. Even more striking was a comparison of the dollar amounts: BlackRock earned $762 million while Blackstone earned $814 million.

Mr. Schwarzman’s key point is that BlackRock made that money with a much larger capital pool. Its market cap is $53 billion, versus Blackstone’s $35 billion. BlackRock manages $4.4 trillion in assets, versus Blackstone’s $272 billion in assets. It is obvious that Blackstone achieved a significantly higher return on capital.

But BlackRock’s listed shares trade at a multiple of 17, much higher than Blackstone shares at a multiple of 10. Why the discrepancy in share price multiples? (Blackstone’s relatively modest share price has been a sore point for Mr. Schwarzman.)

BlackRock is a mainstream asset manager, with index investments and the exchange-traded fund business iShares accounting for a good chunk of the mix. Alternative assets are a small portion of the $4.4 trillion. By contrast, Blackstone is a specialist in alternatives, specifically private equity, hedge funds, real estate and credit. Stock buyers have favored mainstream managers, but that may be changing.

The higher return on capital could be seen as evidence that Blackstone brings in more alpha return than BlackRock. Although one quarter is not sufficient by itself to reach any conclusion, Blackstone has earned outsized returns for years. When I compared the two companies with Goldman Sachs back in 2011 – a milestone in the recovery from the financial crisis – it looked like big investors strongly favored Blackstone funds.

In any event, BlackRock CEO Laurence Fink has long tried to expand the firm’s alternatives portfolio. One of these efforts ended in a notorious debacle— In 2006, Tishman Speyer Properties and BlackRock led the group that bought for $5.4 billion the Stuyvesant Town complex in New York City, a property subsequently valued by Fitch at $1.8 billion.

BlackRock’s own loss was minor, but the incident did not inspire confidence that the company has the skills for this type of investing.

Mr. Schwarzman did not mention the episode, but he did suggest that getting into the real estate business – in which Blackstone has excelled – is not as easy as may seem to aspiring entrants. “So this is something that takes a very, very long time to do well,” he said.

Though he was diplomatic, one has to suspect Mr. Schwarzman enjoys comparing his own company favorably to Mr. Fink’s, given their history. They were once partners; Mr. Fink started a fixed income business named Blackstone Financial.

In 1994, in conflict with Mr. Fink about equity compensation, Mr. Schwarzman sold the business. It was renamed BlackRock and became the phenomenal success that it is—by almost any criterion. Last year Mr. Schwarzman acknowledged (on Bloomberg Radio) that his decision 20 years ago to sell Blackstone Financial was a “heroic” mistake. Everybody makes mistakes, of course.

In this case, the result is two remarkable asset management companies, a fine thing for the industry.

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Tags: Laurence Fink, Stephen Schwarzman