Blackstone's Breit Flows Aren't the Only Thing That Matters

Money is constantly flowing in and out of Blackstone BX. This company is always in a state of flux, with money constantly moving around. But how the money is used also matters.

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Blackstone's stock has surged 26% so far in 2023, including more than 5.5% after its quarterly earnings report on Thursday. A big reason for the surge is that base management fees continue to grow. This is good news for Blackstone, as these fees are one of the company's core ballasts.

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Blackstone's base management fees increased by 25% in 2022, to more than $6 billion. This reflects the firm's continued overall growth in assets under management. These fees are based on market values, but are not dependent on meeting any performance targets or the realization of investments through sales. Despite the volatility in the markets last year, Blackstone's management fees continued to grow.

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Investors tend to focus on Blackstone's fee-related earnings because of the highly market-sensitive nature of when its investments can actually be sold down and generate the realized performance revenue. This revenue, known as "carry," contributes to the firm's overall distributable earnings.

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There are two types of fee-related earnings at Blackstone: those from traditional capital vehicles, and those from so-called perpetual capital vehicles. The latter are designed to generate recurring fees, rather than simply placing bets and selling them later. These fees are performance-based, meaning they can rise and fall based on the vehicle's return, not just its size. For example, Blackstone can earn a 12.5% performance allocation of the annual total return of a perpetual capital vehicle like Breit, as long as it returns at least 5% for the year to investors.

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Fee-related performance revenues for Blackstone decreased by 28% in 2022. This is partially due to Breit's annual net total return not meeting the high standards set in 2021, where it was around 30%. In 2022, this number dropped to a mere 8%. The real-estate group as a whole saw a 37% decrease in fee-related performance revenues.
Blackstone is working to de-risk its management fee volatility with deals like the $4.5 billion injection from UC Investments. This can offset any potential further individual investor redemptions, and Blackstone will earn a management fee on the investment. The firm told analysts on Thursday that some parties had reached out about similar deals, but it would “wait and see” if more such deals made sense.

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The degree to which Breit continues to generate overall fee revenue for Blackstone depends in part on total return, measured by how its net asset value per share changes and how much it distributes to shareholders. That can take a hit if Breit has to mark down the value of its holdings or suffers some other performance issue.
In order for the UC deal to generate incremental gain for Blackstone, Breit needs to achieve an annualized return of 8.7%. This is a bit higher than what Breit did in 2022, but is still below the firm's inception-to-date annualized net return of 12.5%. If Breit can beat the deal's 11.25% hurdle, Blackstone will earn an even higher proportion of performance.

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In the next few years, Blackstone's fee-related performance revenue will increase as more money comes in from vehicles like Blackstone Property Partners and Blackstone Infrastructure Partners. This will be in addition to continuing net asset inflows from other sources, like insurance partnerships. This will expand the base of assets from which Blackstone can collect fees.