Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Blackstone's chairman, CEO and co-founder Stephen Schwarzman is a well-known philanthropist, but can he add math teacher to his resume? 

On an earnings call Thursday, after the New York firm beat expectations for the first time in five quarters, Schwarzman ran through a mini-lesson intended to show one thing: that the alternative asset manager's shares are a bargain. 

Making a Case
On an earnings call Thursday, Blackstone's co-founder laid out the math for why the stock is undervalued
Source: Bloomberg

If investors took a conservative view and focused solely on the firm's fee-related earnings, its shares should be worth $50, Schwarzman said. How'd he get there? Well, Blackstone's fee-related earnings were 82.2 cents and 78.6 cents a share for fiscal 2014 and 2015 respectively, and that figure could reach $1 or more next year  based on projected strong double-digit growth. The S&P 500 yields about 2 percent,  so if you divide Blackstone's estimated $1 of earnings by that yield, it gets you to $50, nearly double Blackstone's closing stock price Thursday of $26.83. 

"I know this seems hard to believe, but it happens to mathematically be true, and finance is supposed to have something to do with mathematics," Schwarzman mused. 

It's hard to argue with his logic: Blackstone's fee-related earnings have proved to be relatively stable and predictable and, by all accounts, are poised to keep climbing. The firm's assets under management climbed to $356.3 billion, setting a record for the 19th consecutive quarter. And it's generating fees on just $266 billion, or 75 percent of that total, below the average of 82 percent over the past eight years, which supports its growth story.

Scaling New Heights
Blackstone's total assets under management reached a record for the 19th consecutive quarter
Source: Company filings

The $50 figure appears to be lofty: It's higher than the analyst consensus 12-month price target of roughly $31 but notably more near term than another idea Schwarzman offered previously -- that the stock would eclipse $100 in the next 10 years. The latter figure includes lumpier, less-predictable distributions from realizations, otherwise known as performance fees or carried interest. Such profits are the bread and butter of firms like Blackstone, whose track record speaks to why pension funds and others are throwing cash at it, but it's widely discounted by public market investors across the industry. 

Unlike rivals Apollo Global Management, Carlyle Group and KKR, which have attempted to buoy their own suffering shares with buybacks, the firm is adamant it won't follow suit for now. 

But any changes to Wall Street's approach to valuing such firms are unlikely to be imminent. While Blackstone waits it out, shareholders should prepare for a few more math lectures. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Fee-related earnings rose 27 percent in the second quarter compared with figures in the period a year earlier, and applying that growth rate to 2015's total of 78.6 cents produces 99.8 cents.

  2. Schwarzman was close enough: It's 2.11 percent, according to Bloomberg data.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net