Breakingviews: Blackstone is calling the bottom, almost

Not even the mighty Blackstone can defy the economy. At present that’s a good thing. The $1 trillion asset manager broke a five-quarter run of declining earnings in the fourth quarter. Money deployed for deals and cash flowing into its funds also increased year-on-year after a similar-length dry spell. Boss Steve Schwarzman says 2023 was the industry’s nadir, which means what comes next is the bounceback. Everything is going as a Blackstone investor might hope – except for one precious piece of the puzzle.

Like his peers, Schwarzman had a rough 2023. Private equity firms couldn’t easily find cheap credit to fund their purchases of companies and assets. At Blackstone, 2023’s lucre from asset sales fell by over half from 2022. Fortunately, such lumpy income has always been cyclical, and thus shareholders tend to pay less attention to it than they do income from fees charged on the funds Blackstone manages. The catch has been that fees have wobbled too, with ructions in areas that are meant to be very stable, like Blackstone’s small-dollar property fund BREIT, which in 2022 experienced a temporary but troubling investor rush for the exits, and has been limiting withdrawals for over a year now.

The drivers of slowing deals, inflows and earnings are all easing now. The Federal Reserve is no longer tightening U.S. monetary conditions. Schwarzman predicts that too-hot inflation has ended, which should lead to rate cuts. Executives say that the pain in real-estate markets is nearing an end, and resilient U.S. GDP growth reported on Thursday supports the sunny outlook. And if the decline in asset values has reached a bottom, now should be the time to start buying and selling again. Blackstone’s fourth-quarter numbers bear some of this out. Profit from asset sales rose 16% year-over-year, helping to drive growth in earnings for the first time since mid-2022.

But there’s still one thing missing: all-important fee income. Management fees slipped slightly from the prior three months, and fees reaped from investment performance have yet to pick back up. Both should stage a revival, but the timing is hard to predict. BREIT, at least, should probably stop gating redemptions this quarter, Blackstone says. But a stabilizing market could bring new challenges: for example, banks too have sensed the change in economic mood, and are beginning to compete again with private lenders like Blackstone. The storm has ceased; the clouds remain.