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No. of Recommendations: 5
The latter, I mean investing pros are pretty familiar with BX and their CEO and this business model.

Well, this is a statement that can be applied to practically every company listed on the NYSE. There are not too many undiscovered NYSE stocks. Like most potential investments, Blackstone bulls think the stock is "misunderstood" while bears or investors bystanders think it is fairly valued or worse.

If the stock is fairly valued (or overvalued) then I think it boils down to fundamental disagreements about the future cash flows of Blackstone and alt asset managers.

It's fairly valued at current levels if one thinks the management fees of the business will stagnate or, even worse, reverse. Blackstone and other alts charge hefty management fees compared to SP500 funds or long only institutional managers. Nothing close to the 200 basis points some accuse alt managers of charging but still, let's call it about 100 bips.

So if you think management fees are a melting ice cube then it's fairly valued.

Back in the day I had a modest investment in a NYSE specialist firm called Van Der Moolen. It was a good business until it wasn't.

Furthermore, incentive fees are poorly valued by the market. This is understandable to a degree since they are variable and in the short-term highly influenced by market fluctuations. In the long term, all of these alt firms have crystallized incentive fees for practically every generation of PE funds (excepting some specialized funds).

Finally, there is the age old argument about whether K-1 status has been a detriment to the valuation of alt asset managers. KKR and ARES have switched to C Corps but not for a very long time. I am reluctant to draw any conclusions about the conversion particularly in an agitated market. It's fair to say other traditional asset managers have been punished in this market too.

Honestly, I don't think it matters for the K-1 alt firms. If the cash flows are as the bulls hope and they are paid out then I win. If the cash flows don't materialize, they won't be paid out. Then I lose. Whether or not the market values these cash flows at a level that makes me happy or sad doesn't really matter unless I need to sell in the meantime.

There are plenty of other "smart" investors now moving into alt managers but I don't really care about that either. If Tiger Global agrees with me about Apollo - fantastic. If they don't, okay. That ValueAct has established a significant position in KKR is a flower in the lapel for alt asset manager bulls but they could reverse their position. Que sera sera.

As I see it this are very sticky businesses with permanent or long-term capital that can grow at double digit rates with very little marginal invested capital required. Sooner or later the market will come around to this conclusion but if it never adequately does so be it. As long as the cash flows are paid out and they are bountiful I'm happy.

In the end, you look for variant perceptions and if you find such opportunities, you buy.

ET
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