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The Blackstone Group LP.: Initiation of Research Coverage

Monday, December 14, 2015

William Blair & Company initiated research coverage of The Blackstone Group L.P. (BX $28.82), the largest alternative asset manager in the world. The company has four industry-leading businesses: private equity, real estate, credit, and hedge fund solutions.

Analyst Chris Shutler estimated the company would generate economic net income (ENI) per unit of $2.23 in 2015, $3.32 in 2016, and $3.27 in 2017. ENI is one of the primary metrics used in measuring Blackstone’s earnings, taking into account the mark-to-market valuation of its portfolio. Shutler believes Blackstone’s ENI and stock will be volatile in the near term based on market movements, and sees the stock as best suited for patient investors.

“We believe industry trends are working in Blackstone’s favor,” Shutler said, “as investors—both institutional and retail—should continue to increase allocations to alternative asset managers as a way to enhance and diversify returns and meet investment goals. Further, we believe the trend of institutions reducing their number of alternative manager relationships benefits scale players, and Blackstone is as scaled and diversified as it gets. Blackstone is one of the oldest and largest private equity firms in the world, the largest real estate investor in the world by a factor of at least two times, the largest discretionary allocator to hedge funds, and one of the largest providers of debt financing. All this scale provides Blackstone with significant competitive advantages, including unparalleled deal flow, information advantages, and attractive hedge fund economics. The sum is greater than the value of the parts.”

Shutler continued, “Blackstone’s foundation is solid; investment performance—a prerequisite for growth—remains exceptional. The management team is deep and the next generation of executive leadership seems to be in place. We believe the alternative asset management industry has higher barriers to entry and scale than the traditional asset management business; because capital is often locked up for several years, reputation, brand, and a legacy of strong investment performance are all important factors. Blackstone is unique in that it is a growth company with a very high distribution yield. We expect a majority of Blackstone’s growth to come from newer products, with an emphasis on longer holding periods and evergreen fund structures.”

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Market Perform (Hold): 3%
Underperform (Sell): 0%

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