GLOBAL INVESTING: Why Blackstone partnership units can possibly sizzle
The headquarters of Blackstone Group in New York.
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I had recommended Wall Street's preeminent leveraged buyout firm and credit/real estate/hedge fund manager Blackstone Group at 27 in early January and the partnership units rose to 31.50 in the next two months before getting slammed by the financial sectors selloff to 29. All the metrics I track to evaluate alternative asset managers tell me Blackstone is a compelling buy once again at 29. Why?
One, Blackstone units trade at 9.8 times current earnings and offer a eight per cent distribution yield. Two, Blackstone has raised $230 billion since 2013, four times more than KKR, Carlyle Group and Oaktree Capital. Three, fee-generating assets under management are a stellar $277 billion at a 13 per cent growth rate. Four, Blackstone can and has borrowed in the global capital market at a cheaper funding rate than Uncle Sam. Five, Blackstone's clients are the world's leading sovereign wealth funds and institutional investors, thanks to its track record of 20 per cent return in real estate and 18 per cent return in private equity. Six, Blackstone benefits from the opening of the IPO window in New York and higher global mergers and acquisitions deal volumes.
Seven, distributable earnings can well soar 30 per cent after their fall last year. Eight, founder/CEO Stephen Schwarzman is a member of President Donald Trump's Wall Street kitchen cabinet and consigliere on infrastructure spending. Nine, Brexit and the oil crash enabled Blackstone to acquire British/energy assets at rock bottom valuations. Ten, Blackstone has delivered blowout returns on its distressed debt and private debt funds, a growth area for the firm. I can easily envisage a buy/sell range of 26-38 for the partnership units in 2017. Global growth, US tax reforms, $100 billion in investible cash and a spectacular rise in performance fees via deal exits make Blackstone the most attractive alt-investment manager in the world for me - other than Asas Capital, my home, of course!
As US wage inflation is now rising at 2.8 per cent, even a year-end Fed Funds rate of 1.25 per cent means the US economy will still have negative real interest rates at year end 2017. The failure to repeal Obamacare ensures Trump's fiscal stimulus means higher Uncle Sam budget deficits if spending rises. This explains the hit in the US dollar since its index peaked at 102 in early February. This is the ideal macro backdrop to invest in emerging markets debt, mainly in high-yield local currency bonds in Brazil, Argentina, India, Indonesia and even Mexico. Obviously, success in this asset class means investing in high yield local currency debt that offers investors positive inflation/volatility adjusted returns. Brazil, for instance, offers some of the world's highest inflation-adjusted returns at 5.50 per cent at a time when the Brasilia central bank could well cut the Selic rate by at least another 300 basis points in 2017. Russian rouble debt returned a fabulous 30 per cent last year after I flagged the macro case for the rodina's 10-year local currency debt in January 2016. Brazil is my macro sovereign debt call of 2017 - blame it on Rio!
There are two countries which I would stay away from no matter how high the real yield: Venezuela and Turkey, where the geopolitics and the economic priorities of the government make no sense to me. There is no investment case in Caracas as President Maduro evokes the ghost of Commandante Hugo Chavez as he leads Venezuela to almost certain sovereign default. Moody's has downgraded Turkey's sovereign debt credit rating to a negative outlook. The failed military coup, the purge of 100,000 members of the Turkish bureaucratic/military/media elite, President Erdogan's concentration of power in Ankara, PKK and terrorist attacks and tensions with Berlin, Washington, Tehran and Moscow make me extremely nervous about Turkish assets, particularly given its high current account deficit, chronic inflation, reliance on offshore hot money and consumer banking credit time bomb. There is a logical macroeconomic reason why Turkish lira 10-year government debt yields almost 11 per cent. As the Syrian Kurd YPG militia, assisted by US Special Forces, liberate Raqqa from terrorists, Ankara faces a new, ominous dimension of Kurdish secessionism that could reignite one of the Middle East's bloodiest insurgencies in Anatolia. Turkish President Erdogan made a grave mistake calling the German and Dutch governments "Nazis" and "fascists". The April 26 referendum to give Erdogan even more authoritarian power while the Syrian civil war enters its endgame and the lira tanks in the currency market makes the Turkish country index fund a strategic short.
The writer is a global equities strategist and fund manager.