Blackstone Group LP bulls are back.
Riding the rally in U.S. stock and real estate prices, Blackstone has taken three hotel companies public in the past six months, prompting traders to load up on bullish options on the world’s biggest buyout firm. Wagers that the shares will rise were the most expensive in four years versus bearish bets before the company reported quarterly earnings today.
A boom in initial public offerings and mergers and acquisitions in the first quarter is fueling optimism that the New York-based firm’s shares will resume a run that saw them double in 2013. Blackstone will benefit as long as the stock-market rally lasts, according to Robert MacDonald, who helps oversees more than $90 billion at Santa Fe, New Mexico-based Thornburg Investment Management Inc.
“When the stock market is going up and there are many IPOs, it’s easy to imagine Blackstone will be able to liquidate its investments and take big gains,” MacDonald said by phone. His firm owns shares in Blackstone. “If you look at the track record of alternative asset managers, it’s very good. It seems likely pension funds that are invested in Blackstone will increase their allocations over time.”
Blackstone trades just below its IPO price of $31 a share. It fell as much as 88 percent from its share sale in June 2007 through early 2009 before rebounding as global markets recovered from the financial crisis. The stock reached a record of $35.18 on March 10. The shares subsequently fell 12 percent through yesterday’s close, more than the 0.8 percent decline in the Standard & Poor’s 500 Index in the same period.
Economic net income, a measure of earnings excluding some costs tied to the firm’s 2007 IPO, increased to $813.9 million, or 70 cents a share, from $628.3 million, or 55 cents, a year earlier, Blackstone said today in a statement. Analysts had expected earnings of 55 cents a share, according to the average estimate in a Bloomberg survey.
ENI will be $3.03 a share in 2014, after surging 73 percent to $3.07 last year, according to analysts surveyed by Bloomberg. Analysts estimate it will jump 17 percent in 2015, data compiled by Bloomberg show.
Hilton Worldwide Holdings Inc.’s IPO last December set Blackstone up for its largest-ever profit of about $10 billion. Hilton and Extended Stay America Inc. have both risen since their IPOs in December and November, respectively. La Quinta Holdings Inc. climbed on its first day of trading in April, though the Blackstone-backed hotel chain has since fallen.
The value of announced acquisitions globally in the first quarter rose 29 percent to $652 billion, the best start to a year since 2007. IPOs have experienced a similar boom, with the value of share sales jumping more than fivefold to about $219 billion in the same period, data compiled by Bloomberg show.
Private-equity firms such as Blackstone need a buoyant stock market to help them maximize profits when they sell the shares in their investments. Investors including pension plans and endowments give their money to buyout firms, expecting them to return a profit over a 10-year cycle. Private-equity houses typically charge an annual management fee of 1.5 percent to 2 percent of committed funds and keep 20 percent of the profit from their investments.
Blackstone options with an exercise price 10 percent below the shares cost 2 points more than calls betting on a 10 percent gain as of yesterday, according to three-month implied volatility data compiled by Bloomberg. The price relationship known as skew fell to 1.17 points on April 10, the lowest since January 2010.
Peter Rose, a Blackstone spokesman, said he wouldn’t comment on the options trading.
The buyout group, which manages $266 billion, trades at 9.9 times estimated earnings, data compiled by Bloomberg show. That’s less than the valuation of 15.3 for the S&P 500’s diversified financials group. Blackstone has always traded at less than the price-earnings ratio for its industry.
Blackstone will continue to trade at a discount until it improves shareholder rights, according to Stephen Ellis, an analyst at Morningstar Inc. Stock-market investors put lower valuations on private-equity firms because their partnership structure gives executives more control over profits.
“The lack of control from a shareholder perspective and the lower level of shareholder rights in general: that’s not particularly attractive from a shareholder standpoint,” Ellis said. “Blackstone shares have been trading at a discount for seven years or so now, since they went public. That discount isn’t going to disappear.”
The Chicago Board Options Exchange Volatility Index, the measure of expected U.S. equity volatility known as the VIX, decreased 4.5 percent to 13.54 today at 11:44 a.m. New York time. The VStoxx Index, which does the same for euro-area stocks, dropped 1.9 percent to 16.99.
Traders own more bullish Blackstone options than bearish ones. There were 246,313 calls giving the right to buy the stock as of April 15, or 22 percent more than puts to sell, data compiled by Bloomberg show.
“Blackstone has executed brilliantly,” Mitch Rubin, the New York-based chief investment officer of RiverPark Capital Management LLC, said by telephone. His firm manages about $3 billion, including Blackstone shares. “Their realizations are going to pick up and be significant. We think the earnings trajectory is quite strong.”