Blackstone Group (BX) — my Top Pick for 2023 — is one of the world's leading managers of alternative assets, including private equity, real estate, hedge funds, credit-oriented funds, and closed-end mutual funds, notes analyst Stephen Biggar, at Argus Research, a leading independent Wall Street research firm.
We believe that Blackstone has strong long-term underlying earnings potential, particularly from growth in fee-based asset under management, which should benefit from more fund vehicles becoming fee-eligible. The company also has a record $182 billion in dry powder, allowing it to take advantage of current market dislocations to purchase assets at a discount.
Despite a weaker market backdrop, Blackstone had a strong $45 billion of fundraising in 3Q, which we believe speaks to the considerable capabilities and brand name of the franchise. In recent years, Blackstone has rapidly grown its fee-earning assets under management. The company sees considerable growth in real estate, private equity, infrastructure, tactical opportunities, and credit assets. Over the long term, management expects fee-related earnings to account for about 65% of the total.
We believe this is an important catalyst for the shares, as it reduces variability in earnings and raises prospects for consistently higher distributions. New avenues for growth include infrastructure investments (where Blackstone has made considerable fundraising efforts) as well as businesses such as insurance, life sciences, and technology.
We believe that Blackstone has strong long-term underlying earnings potential, especially from fee-related earnings. Blackstone had $360 billion of perpetual capital at the end of 3Q, up 83% from the prior year, mostly in real estate and credit & insurance, enabling it to make long-term decisions and not sell at inappropriate times.
An investment in Blackstone carries substantial risks. Investors must be comfortable with the opaque and complex nature of the alternative asset manager business model. Blackstone's funds can have hidden dangers that investors cannot anticipate in advance. In short, investors in Blackstone are betting that the company's outstanding investment track record will continue in the future.
We believe that BX remains a best-in-class manager of alternative assets, as demonstrated by its return on investment metrics, monetization performance, distribution history, and ability to attract global capital. BX currently trades at 16.6-times our 2022 distributable earnings estimate and at 15.8-times our 2023 estimate.
Given the company's operating margins in the high 40s, 5.1% yield (based on our forward-four-quarter distribution estimate), and expanding base of fee-earning assets, we believe that the shares merit a higher valuation.
We also expect the conversion to corporate status to continue to expand ownership and increase liquidity, further improving valuation multiples. Our target price of $115 implies a multiple of 21-times our PE estimate for 2023.
