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A Look Into Blackstone’s Largest Private Equity Fund

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Morgan Stanley analysts Matthew Kelley and Thomas Whitehead affirm their Overweight rating on The Blackstone Group L.P. (NYSE:BX) and boost the price target on the stock from $35 to $37 based on their latest estimates of the company’s distributable earnings (DE), economic net income (ENI) and distributions for 2014 and 2015. They take a deep look at Blackstone’s largest private equity fund, BCP V.

“We believe BX offers the best combination of fee-paying AuM growth (11% CAGR ’13-’17e) & rising distributions driven by Real Estate exits (where we estimate ~$7/unit value of future carry) & BCP V ($21B) crossing hurdle,” say the analysts in their March 18, 2014 research note. “Longer-term, we view The Blackstone Group L.P. (NYSE:BX)’s diversified platform as an ideal one-stop shop for pensions & sovereign wealth funds increasingly looking for diverse solutions with fewer GPs.”

Higher fees, higher realizations

The analysts anticipate that The Blackstone Group L.P. (NYSE:BX) would be able to achieve steadier fee-related earnings during 2013-17e based on an 11% growth in fee-generating AUM during that period. AUM growth would be driven by higher demand from Pensions and SWFs and a thrust into HNW and retail channels.

According to the analysts, the market is likely to bid up The Blackstone Group L.P.(NYSE:BX) stock due to higher realizations in its Real Estate (during 2014-15) and Private Equity (during 4Q14-2015) investments.

Blackstone’s BCP V fund a cornerstone of the projections

The $21 billion BCP V fund is The Blackstone Group L.P. (NYSE:BX)’s largest PE fund ever, and it has made significant progress towards crossing the hurdle rate during the past five quarters. The analysts estimate that despite the sluggish performance of the equity markets during 2014 YTD, the BCP V fund is still an outperformer and is soon likely to bridge the gap to its hurdle rate.

“We estimate that BCP V could close another ~$300mm towards hurdle in 1Q14 based on an estimated ~3% qtd appreciation,” says the research note. “Our roll-forward of its gain to cross carry threshold, incorporating 3.5% quarterly net IRR and $2B cost basis exited during 2014, results in a 4Q14 hurdle cross and meaningful contribution to 2014-15e ENI.”

The impact of BCP V’s hurdle cross is shown in the table below.

Blackstone bcp-v-hurdle-cross

4Q13 earnings beat

In January The Blackstone Group L.P. (NYSE:BX) declared a solid earnings slate for Q4 2013, beating market expectations on the key performance metrics, leading Stern Agee analyst Jason Weyeneth to rate the company as a Buy.

Risk reward analysis

The following graph displays Morgan Stanley’s risk reward view on The Blackstone Group L.P.(NYSE:BX) given the following situations by 2015:

  • base case of $37 PT  (11% fee-paying AUM growth + increasing exits)
  • bull case of $48 and (Pro-cyclical environment for fundraising & exits)
  • bear case of $20 (Market pullback)

Blackstone situations

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