Premium valuations among alternatives
In the alternative asset management industry, the preferred indicators are the price-to-economic-net-income multiple and the price-to-distributable-earnings measure. Distributable earnings include the net realized fees and total management fees. Economic net income combines distributable earnings as well as unrealized fees.
The price-to-distributable-earnings measure is more accurate because it excludes unrealized net income. Blackstone, on a price-to-economic-net-income-multiple basis, is valued at 10x.
Among alternative asset managers, Blackstone is trading at a premium. Blackstone’s price-to-distributable-earnings was 14x, the highest among the alternative asset manager class. The company is trading at a premium compared to Carlyle Group (CG), 3I Group, and KKR & Co. (KKR), mainly due to its innovative product offerings, hedge fund solutions, real estate, and growth in the traditional private equity business.
Alternative versus traditional asset managers
Blackstone is trading at a significant discount when compared with traditional asset managers including BlackRock (BLK), Bank of New York Mellon Asset Management (BK), and Franklin Resources (BEN), together make up 2.73% of the Financial Select Sector SPDR Fund (XLF).
The main reasons for the discount are Blackstone’s reduced scope for capital deployment, and the higher risk that its leverage and interest rates would be impacted during downturns. Private equity players typically hold company assets for a longer duration, resulting in exits through public offerings or the selling of stakes in a given company. This results in reduced scope for redeployment or liquidating of investments.