Blackstone Group LP (BX)

(Market Call Minute.) He would pass on this. Carlysle Group have been selling off their pools, and this company hasn’t started yet. (See Top Picks.)

This has not run up a lot, like other financials. A private equity company, but they have a hedge fund business. Has a great dividend yield of 5.17%. They’re very good at harvesting their assets. They’ve been able to use the debt market when they buy things, to lever them up. Have brought in over $100 billion, that they can actually deploy if something happens. (Analysts’ price target is $35.50.)

It is one of the top private equity companies in the world. They are an L.P. so get special tax treatment and you would have to file with the IRS even if you are a Canadian. You are better to own it through a fund so they do all the work with the IRS.

KKR & Co (KKR-N) or Blackstone (BX-N)? He prefers an asset manager that is focused on public market equities. Asset classes are always being revalued. At certain times, certain asset classes do better than others. We have just gone through 10 years where regulation, compliance and rules around being a public company went through the roof, and it became very, very expensive. During that time, managing investing in private companies became very attractive, as they didn’t have the same problems. However, many private companies trade at higher valuations than public market companies, and yet public market companies are liquid every day and can be bought or sold. We have entered a period of many years where public market equities and developed markets, are likely to outperform. Asset managers in that area are under-owned and under-loved, and things changing for the better. Multiples are expanding. Prefers Morgan Stanley (MS-N).

They have a private equity business, hedge funds and real estate. He thinks this is a very good environment for a private equity firm. They bought a lot of cheap assets in 07/08. They have a lot of capital to buy things with. Debt is not that expensive. (Analysts’ target: $35.13) .

This is very deal driven and very opaque driven on how they make their money and what the current investments are. Had a lot in energy about a year ago, which has done well. But look at the volatility in the stock since it went public. It has been so up and down. Any sort of turn-down in the market could be a problem. A very volatile stock. He would rather own this at the bottom of the cycle rather than the top. Dividend yield of 6%+.

These kinds of companies are institutional products, because they are very sophisticated and very complex. The capital is raised in 10 year tranches, and can fall if the return on the funds is not the greatest. The premise that is sold to retail investors is that they will get a portion of the 2% management fee and it will rise over time. There is no guarantee that this will continue to happen. Also, they tend to spin out companies that have been successful and made money where you would get a one-time special gain. Feels these are more speculative investments than you would otherwise expect them to be. If you have made some money, he would suggest you take your money off the table and look at other segments that have less volatility.

There are arguments that this is trading at a significant discount to what its breakup value is. Very, very smart guys. He doesn’t like investing in private equity companies. The people that make all the money in private equity companies are the guys that work for the companies. A very tough way to make a living. Dividend yield of 5.6%.

He is positive on this company. He basically likes the financial space and thinks this one will move up with the rest of the financials on the back of higher interest rates and regulatory reforms. Trading at a very reasonable valuation. It has a good payout.

The largest private equity firm globally. Trading at 10X earnings. The stock really didn’t move when all the other financials did. They have about $100 billion that they can spend to buy things if things go bad. They were really good buyers of assets all the way from 2008-2009. Have some great assets which have matured and is now time to sell, but they need a strong equity market. When they get this in the next couple of years, they will harvest a lot from the purchases they made. Not expensive. Dividend yield of 5.45%. (Analysts’ price target is $33.83.)

Investment companies are certainly benefiting from what we have seen – regulation and deregulation. The directional winds are at the back of all these companies. We have seen a move on these companies, but it will not be a straight line up. It should move to high lows and higher highs.

Expectations for 2016 would be for merger and acquisition stocks to pick up. There is going to be more consolidation. If the corporate tax rate is cut, there is going to be more money flying around, which will bode well for companies like this. You have to understand that this is a project by project investment.

They pay a good dividend. They have this great period when they harvest all of their profits. The problem now is that there are fewer opportunities around and more people looking at them. They are competing with pension funds. In the US a pension companies could not do this and so have had to use BX-N in the past but now rules are starting to change. They are not seeing the opportunities they had in ’08 and ’09. The sweet spot is gone. Wait for a downturn in the market to buy these things.

These guys get the best talent and the best deals. They are the best in private equity. This is not a time to abandon it.

He knows this company very well. The private equity industry works on very definable cycles. They create value when the economy is weak and they are able to buy businesses when earnings are depressed. They build up profit and ultimately crystallize when they exit their investments. The whole private equity group in general have been trading a lot with high-yield bond yields. It doesn’t feel timely to him.