Susquehanna: Positive On Blackstone, Alternative Assets Becoming The 'New Active'

Analyst Doug Sipkin's rationale is that, "It is getting harder for mutual funds to outperform other investment vehicles given pressure from passive and persistent outflows… Accordingly, if investors want pure active/alpha, they are increasingly allocating capital to alternative managers and products."

Several of the charts below help to illustrate how this trend is playing out.

Tale Of The Tape – Past 3 Years

Susquehanna initiated Blackstone with a Positive rating and $53 price target. The Susquehanna PT represents an approximated 22 percent potential upside based on a May 22 closing price of $43.41 per share.

Related Link: Susquehanna: Time To Buy Blackstone Group

Susquehanna's PT Rationale

Susquehanna's $53 target price was based upon a sum of the parts valuation. It was also supported by a "top down view" that a forward Blackstone dividend yield of 6.8 percent, (based upon a 2015E distribution of $2.94 per share), is excessive compared to the yields of the top 25 financial firms.

Blackstone has traded in a 52-week range of $26.50 to $44.43, and Susquehanna pegs the downside risk at $34 per share.

Blackstone: Deeper Dive

Blackstone's Diversity: Fees By Segment

Sipkin noted, "BX is incredibly diverse, which should provide some stability across market cycles. At the end of 1Q15, private equity, real estate, credit, and hedge fund fee based assets accounted for 22 percent, 23 percent, 29 percent, and 27 percent, respectively."

'Undisputed Heavyweight Champion' – BX Real Estate

Sipkin stated, "This scale typically drives superior deal sourcing as third parties look for partners with the ability to leverage size and speed."

Related Link: Blackstone CEO Schwarzman Talks Global Real Estate, Mega Deals And More

Blackstone's recent negotiated deal with General Electric Company GE to purchase GE Capital's real estate assets teamed up with Wells Fargo & Co WFC buying the senior mortgage debt, is an example of how Blackstone's real estate scale benefits shareholders.

Public Investments: Smooth Performance Fee Realization

When Blackstone sponsors an IPO, the pattern has been to retain a majority interest of shares and continue to realize gains through secondary stock offerings over the subsequent few years.

The liquidity of public markets makes it easier for Blackstone to time the recognition of these gains.

Dividends And Valuation

Blackstone's yield is competitive with its private equity peer group; however, during the past 12 months, including the approximately 6.14 percent dividend yield, Blackstone unit holders have received an impressive sector leading total return of around 46.75 percent.

Sipkin believes "the yield gap between BX and other financial companies is excessive," and pointed to Wells Fargo shares relatively high yield of 2.7 percent as an example.

Related Link: Blackstone's Michael Nash Talks Debt And The Real Estate Cycle

If his thesis is correct, the multiple on Blackstone shares should increase with investors willing to accept a lower dividend due to the quality of the earnings stream.

Alternative Assets & ETFs Gaining Market Share Vs. Actively Managed Funds

"Alternatives are becoming the desired venue for alpha seeking and BX is the preeminent alternative manager. Accordingly, we believe alternatives will continue to gain share from other alpha seeking vehicles," stated Sipkin.

Susquehanna On PT Risks

According to Susquehanna, risks include "a downturn in equity and debt markets, a spike in interest rates, increased regulation, and a change in carried interest taxation."

Susquehanna: Bottom Line

Sipkin believes that "investors are increasingly choosing lower fee passive strategies or higher fee alpha searching active strategies. That alpha continues to manifest in the alternative space."

In Susquehanna's view, Blackstone "represents the best of the next generation of active investing." By initiating Blackstone Group at a Positive rating, Susquehanna "expect[s] this stock to appreciate by at least 20 percent over the next 12 months."