December 6, 2023

Investment Banking

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Here’s Why 1 Investment Bank Says Blackstone Just Hit a “Major Milestone”

Blackstone (BX 0.66%) recently reached a huge milestone when it surpassed over $1 trillion in assets under management (AUM) in the second quarter. It became the first global alternative asset manager to hit that level and will add another notch to its belt when it joins the S&P 500 index later this month.

Every quarter, S&P Dow Jones Indices (a joint venture between S&P Global and CME Group) rebalance the index, removing those companies that no longer meet eligibility requirements while replacing them with newcomers that do. The addition to the S&P 500 is a significant accomplishment, since the index is one of the most common benchmarks for measuring the stock market’s performance.

Morgan Stanley said its addition to the index was “a major milestone” that could lay a foundation for other companies like it. Here’s why this news is a big deal.

Blackstone’s unique investment business

Blackstone manages investments for big money managers, including pension funds and institutional investors, and its $1 trillion in AUM makes it one of the largest asset managers in the world. 

What sets Blackstone apart from competitors is its investing style. Prominent asset managers like BlackRock and T. Rowe Price primarily create index and ETF products based on stocks, bonds, and cash-like investments. Blackstone focuses on alternative investments in real estate, private equity, hedge fund products, and credit products such as collateralized loan obligations.

Alternative investments have grown in popularity among institutions and hedge funds because they provide diversification and have a low correlation with traditional financial assets. Blackstone utilizes its expertise to take nontraditional approaches to investing in less-liquid asset classes and can also use leverage to boost returns. 

The firm earns fees as a percentage of its total AUM, which provides the firm with a steady source of cash flow. For this reason, growing AUM is crucial. Since 2013, Blackstone has grown its AUM by over 13% annually, going from $266 billion to over $1 trillion. 

Why Blackstone’s recent achievement is “a major milestone”

Blackstone’s addition to the S&P 500 index follows changes to rules by the S&P Index Committee. The committee updated its inclusion rules to clarify that companies with Blackstone’s share-class structure are eligible for inclusion. Blackstone’s preferred stockholders hold most of the company’s voting rights, which differs from most other companies where these rights fall on common shareholders. 

Getting added to the S&P 500 is “a major milestone,” according to Morgan Stanley. Blackstone is the first alternative asset manager added to the index, which could clear the way for other alternative asset managers like Apollo Global Management, Ares Management, and KKR

Investors received the news of Blackstone’s addition to the S&P 500 with open arms. Its recent gains built on the stock’s already solid year, which is up over 60% year to date.

People have a business meeting in a conference room.

Image source: Getty Images.

The private equity firm has had a good year, but investors will want to keep an eye on this

Despite the stock’s advancement, Blackstone still sits 20% below its all-time high of $139 from November 2021. Higher interest rates have dragged down Blackstone’s business. The Federal Reserve has raised interest rates several times since March 2022 to bring down inflation in the economy.

As a result, higher interest rates have significantly impacted interest rate-sensitive investments. Blackstone’s real estate investment trust (BREIT) is one investment vehicle feeling the pressure.

The firm saw massive redemption requests from clients looking to take cash out of its BREIT vehicle beginning in November last year. That month, the firm returned $1.3 billion to investors from the nearly $70 billion fund. It saw redemption requests continue to pile up in the months that followed. However, the fund limits the amount it will pay to 5% of its net asset value, preventing a “run” on these investments.

Redemption requests have slowed down, and the fund has performed better in recent months, but this is one area investors will want to keep an eye on in this high-interest rate environment.

Demand for alternative assets will double over five years, according to one expert

Blackstone’s addition to the S&P 500 index is big news for the company and other alternative asset managers like it. As a member of the S&P 500, Blackstone will benefit from higher visibility and increased attention from investors. It should also benefit from increased demand for its stock, as mutual funds and ETFs that track the index need to buy to match the index’s allocation.

The firm has grown nicely over the last decade as more money managers look to add alternative investments to their diversified portfolios. According to the research firm Preqin, strong growth will continue with the global market for alternative investments doubling by 2027 to an $18.3 trillion market. Blackstone is well positioned to capitalize on this growth, and its recent addition to the S&P 500 makes it a solid stock that investors should continue holding as part of their diversified portfolios.

Courtney Carlsen has positions in Morgan Stanley. The Motley Fool has positions in and recommends Blackstone, KKR, and S&P Global. The Motley Fool recommends CME Group and T. Rowe Price Group. The Motley Fool has a disclosure policy.