A wide-moat powerhouse with 20% total-return potential

Last week, I introduced Blue Owl Capital (OWL) as a Speculative Strong Buy on The Ground Up. And this despite its unusually high dividend yield that, by my estimation, has a 20% chance of getting cut in the next 12 months.

If that doesn’t sound like me, keep in mind that I don’t believe in following rules for rules’ sake. While they serve as valuable guidelines, every opportunity needs to be analyzed according to its own unique parameters.

So that’s what I did with Blue Owl, acknowledging its diversified alternative asset management platform that includes:

I completely understand why other investors have fixated on the current private-credit risks. However, Blue Owl benefits from multiple revenue streams and a growing asset base.

It also has exposure to the artificial intelligence (AI) infrastructure boom that helps balance it out even further. That’s why Blue Owl was able to report the impressive third-quarter results it did – after I published my evaluation, mind you.

Fee-related earnings rose 15% over the trailing 12 months. Distributable earnings increased 14%. And assets under management (AUM) rose 12% year over year to about $330 billion.

Unsurprisingly, shares have gained on the news, but I still believe they have more potential.

I also believe similar companies are in better places than Mr. Market is giving them credit for. So I’m turning my attention to global alternative asset management behemoth Blackstone (BX).

It has substantial exposure to everything from private credit to real estate, and infrastructure. So naturally, its stock is pretty unloved right now.

But that just makes me want to dig in further to see if we have another bargain opportunity in reach.

Much like Blue Owl, Blackstone's latest quarter shows that artificial intelligence (AI) is opening extraordinary opportunities. Alternative asset managers are being asked more and more to finance this groundbreaking infrastructure expansion.

This is both an amazing opportunity and quite the conundrum thanks to elevated borrowing costs. Geopolitical uncertainty and a sluggish market for asset sales have made it even more difficult to monetize existing investments.

That’s why Blackstone's net realizations declined 34% year over year in the third quarter. This included a 49% drop in private equity and 21% in real estate.

Realizations, for the record, are very important for alternative asset managers, serving as an important source of distributable earnings. When a firm can’t reasonably sell portfolio companies or take them public, it impacts performance-related earnings.

So it says a lot that Blackstone was still able to report $1.7 billion in distributable earnings. At $1.32 per share, this was still below Q3-25’s $1.52. But it could have been much worse.

Meanwhile, fee-related earnings rose 6% to approximately $1.57 billion, serving as another positive sign of the firm’s resilience.

In his quarterly call, CEO Stephen Schwarzman didn’t shy away from discussing current challenges. But he also expressed considerable optimism going forward, especially about AI opportunities that are “in the earliest stages of an… uplift in productivity.”

So next year? He believes it will be outstanding.

Even if this year really isn’t going so well.

Analyzing Blackstone’s larger results, the firm ended Q3 with a record $1.37 trillion in assets under management (AUM). Up 10% year over year, it’s backed by $63.3 billion in quarterly inflows.

However, digging into the firm’s four major operating segments does show reason for concern.

Real Estate, for starters, fell 4% year over year to land at about $309 billion in AUM. Segment fee-related and distributable earnings both declined by 9% and 10%, respectively. And opportunistic real estate investments depreciated 3.2% thanks to ongoing elevated financing costs.

The eventual commercial real estate (CRE) recovery should be an important earnings catalyst here. It’s just a matter of waiting for it to happen.

Private Equity, for its part, grew 18% to generate about $465 billion in AUM. And fee-related earnings rose an impressive 26% thanks to ongoing fundraising and investments.

That’s the good news. The bad news is that net realizations fell 49%. So we’re seeing a clear disconnect between underlying portfolio performance and monetizing investments.

Yet, in another twist, infrastructure investments grew 6.4% during the quarter, indicating that demand for essential infrastructure, at least, remains healthy.

Then there’s Blackstone’s Credit & Insurance department, which is its largest segment by AUM at approximately $480 billion. That was up 11% year over year.

The business attracted around $35.8 billion in quarterly inflows from private lending demand, insurance-related investment strategies, and asset-backed financing. But fee-related earnings fell, this time by 1%.

And Blackstone’s flagship private credit fund, BCRED, saw increased redemption requests at nearly 10% of shares. Its repurchase limits did help balance that negativity out for the quarter.

However, if this becomes a trend, it could weigh down future fundraising and shareholder confidence.

Last but not least, the Multi-Asset Investing segment saw the most impressive quarterly growth at 22% year over year to $114 billion in AUM. And fee-related earnings actually increased as well by 26%, with distributable earnings rising 31%.

In short, the news could have been better and could have been worse… leaving investors to turn their eyes to the future and what it could hold.

The way I see it, Blackstone has three particularly compelling catalysts that could make its fortunes much more clear:

While I particularly favor that last catalyst, any one of them is quite possible and could benefit Blackstone significantly.

As for the company’s current state of financial existence, it ended the quarter with $228.9 billion in dry powder for future investments – as in capital its investment fund clients already committed. So Blackstone won’t have to rely on its own capital to fund every transaction that comes along.

Blackstone also has about $562 billion in perpetual capital AUM to support recurring management fees and reduce dependence on typical fund liquidation cycles. And its investment-grade credit profile provides even more financial padding.

With that said, it’s important to understand the difference between corporate leverage and borrowings inside managed investment funds. The latter creates investment risks, yes, but not necessarily direct liabilities on Blackstone’s balance sheet.

That’s a distinction to keep in mind with any alternative asset manager assessment.

While writing this article, Blackstone was trading at $117.45, which is roughly 19.7x its trailing distributable earnings of $5.95 per share. So we’re looking at a significantly higher number than Blue Owl's 11x earnings multiple.

There are differences in their business mix and earnings qualities that could potentially explain that difference. However, that’s not the end of my analysis.

Nor should it be.

Blackstone's trailing per-share dividend payments total $5.06, which makes for a 4.3% yield. Yet its quarterly dividend fluctuates alongside its distributable earnings. So its latest quarterly payout, which was $1.12, actually fell 13% year over year.

If distributable earnings recover to $6.50 per share next year, a 21x multiple would support a share price near $137. This would represent a 17% appreciation from our previously mentioned reference price – with more than 20% in potential total returns after dividends.

There’s no doubt in my mind that Blackstone is a wide-moat business with enormous scale, institutional client relationships, a diversified array of investment strategies, and a powerful fundraising engine.

However, at about 20x trailing distributable earnings, it’s offering less valuation protection than Blue Owl despite its credible path to attractive total returns.

I do view BX as a Buy with a preliminary 12-month price target of $137 based on the recovery scenario outlined above. But OWL is still my preferred pick of the two based on its compelling speculative income and the total-return opportunity its currently underappreciated share price represents.

Both companies should benefit from any future private capital growth. But I can’t stop stressing that the price you pay matters.

Ultimately, I'd rather buy a discounted wide moat than a bigger castle at a premium.

Happy SWAN investing,

Brad Thomas
Editor, Wide Moat Daily